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MONEY  AND   BANKING 


ILLUSTRATED    BY 
AMERICAN  HISTORY 


REVISED  AND   CONTINUED  TO  THE   YEAR   1911 
BY 

HORACE  WHITE 


FOURTH  EDITION 


GINN  AND  COMPANY 

BOSTON  •  NEW  YORK  •  CHICAGO  •  LONDON 


fix 


Copyright,  1895,  1902,  1908,  igsi 
By  HORACE  WHITE 


ALL   RIGHTS    RESERVED 
913.10 


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gftc  iatftenatam   3$re« 

GINN  AND  COMPANY  •  PRO- 
PRIETORS •  BOSTON  •  U.S.A. 


PREFACE  TO  THE  FOURTH   EDITION 

During  the  past  three  years  a  marked  change  in  public 
sentiment  regarding  the  money  question  has  forced  its  way 
into  the  national  councils.  In  the  act  of  May  30,  1908,  the 
two  houses  of  Congress,  for  the  first  time  since  the  Civil 
War,  agreed  that  a  bond-seCured  currency  was  not  the  only 
kind  of  bank  paper  fit  to  circulate  in  the  community.  Al- 
though no  bank  notes  have  been  issued  under  the  act, 
authority  exists  to  issue  them  on  the  security  of  commercial 
paper  owned  by  the  banks  and  retained  by  themselves  in 
associations  formed  for  the  purpose. 

The  preconceptions  of  the  past  having  been  shaken,  other 
steps  followed.  A  National  Monetary  Commission  was 
formed,  which  has  collected  and  published  a  mass  of  facts, 
of  legislation,  and  of  historical  and  general  information  on 
the  subject  of  banking  far  exceeding  in  magnitude  anything 
ever  brought  together  heretofore  in  the  world's  history.  Most, 
if  not  all,  of  this  compilation  is  well  worth  its  cost,  for  al- 
though no  person  can  be  expected  to  read  the  whole  of  it, 
all  who  are  qualified  to  take  part  in  the  discussion,  and  in 
the  work  of  framing  monetary  legislation,  can  readily  find  in 
it  what  they  need. 

Another  indication  of  the  drift  of  opinion  is  found  in  the 
act  of  Congress  providing  for  the  issue  of  bonds  for  the  con- 
struction of  the  Panama  canal,  which  are  not  available  for 
security  for  national-bank  circulation.  These  are  the  first 
bonds  so  issued  since  the  national  banking  law  was  passed. 

iii 


IV  PREFACE 

It  implies  that  the  government  now  looks  to  the  end  of  a 
bond-secured  currency. 

What  is  to  take  its  place  has  not  yet  been  decided.  The 
chairman  of  the  National  Monetary  Commission  has  out- 
lined a  plan  for  a  Reserve  Association  of  America,  with  a 
capital  of  $300,000,000,  which  shall  be  the  fiscal  agent  of 
the  government  and  be  owned  by  the  national  banks  partici- 
pating in  proportion  to  their  capital,  —  their  shares  not  to 
be  transferable.  The  full  text  of  this  plan  is  printed  as  an 
appendix  to  this  volume,  and  an  analysis  of  it  is  given  in 
Chapter  XXI.  The  American  Bankers'  Association  has 
given  a  favorable  reception  to  the  plan  through  its  Executive 
Council.  Altogether  there  is  now  a  fair  prospect  of  legisla- 
tion in  some  form  which  shall  give  us  a  flexible  currency 
redeemable  at  all  times  in  gold,  and  a  loan  market  for  com- 
mercial paper  of  standard  grade  which  shall  be  available  at 
a  rate  of  discount  uniform  in  all  parts  of  the  country  where 

participating  banks  exist. 

H.  W. 


CONTENTS 


BOOK   I.    EVOLUTION   OF   MONEY 


CHAPTER  I.     MONEY   A   COMMODITY 


Page 


Difference  between  Money  and  Promises  to  Pay.  Aristotle  on 
the  Origin  of  Money.  Various  Kinds  of  Money.  Wampum  and 
Beaver.  Disappearance  of  Wampum.  Tobacco  Money  in  Virginia. 
Rapid  Decline  in  Price.  Tobacco  Riots  in  1683,  Tobacco  Paper 
Currency.  Early  Massachusetts  Currency.  Early  New  York 
Money.  Rice  Currency.  Early  California  Devices.  Private  Coins 
and  "  Slugs."  General  Principles.  The  Value  of  Gold.  All  Trade 
is  Barter.  Portability.  Stability.  Uniformity.  Durability.  Divisi- 
bility. Cognizability.  Gold  not  wholly  Free  from  Variations  in 
Value.  A  Standard  of  Deferred  Payments.  Money  a  Product  of 
Evolution.    Recapitulation.    Authorities. 


CHAPTER  n.     COINAGE 


Principles  of  Coinage.  Subsidiary  and  Token  Coins.  Shape 
of  Coins.  Materials.  Weight  Coins.  The  Monetary  Standard. 
An  "Ideal  Dollar"  Impossible.  Seigniorage.  Deposits  of  Gold 
Bullion.  Assaying.  Coining.  Private  Coining  Inadmissible.  The 
Mint  Price  of  Gold.  A  "  Premium  on  Gold."  Abrasion  of  Coin. 
The  Spanish  Dollar.  Gresham's  Law.  Early  Colonial  Coins.  The 
Pine-Tree  Shilling.  The  Proclamation  of  Anne.  It  is  disregarded. 
Money  of  Account.    Recapitulation.    Authorities. 

CHAPTER  III.     LEGAL  TENDER 30 

Roman  Law  of  Tender.  Origin  of  Modern  Law  of  Tender.  Our 
First  Coinage  Act.  Double  Legal  Tender.  Its  Failure.  Our 
Second  Coinage  Act.  Silver  Coins  in  the  United  States  prior  to 
1853.  Our  Third  Coinage  Act.  Our  Fourth  Coinage  Act.  The 
Trade  Dollar.  Present  Varieties  of  Legal  Tender.  Recapitulation. 
Authorities. 


VI  CONTENTS 

Page 
CHAPTER  IV.     GOLD  AS  A  METAL 41 

Where  Gold  is  found.  Its  Affinity  for  Quicksilver.  Placer  Gold. 
Methods  of  Collection.  Hydraulic  Mining.  Quartz  Crushing. 
Chlorination.    The  Cyanide  Process.    Recapitulation. 

CHAPTER  V.     GOLD  PRODUCTION 49 

First  Half  of  the  Nineteenth  Century.  California  and  Australia. 
The  Comstock  Lode.  South  Africa.  The  Klondike.  Cripple 
Creek,  Colorado.  Second  Half  of  the  Century.  Effect  of  New 
Gold  on  Prices.  Its  Modus  Operandi.  Prospect  of  Continued 
Advance.  The  Quantity  Theory.  Recapitulation.  Authorities  for 
Chapters  IV  and  V. 

CHAPTER  VI.     THE  GOLD  STANDARD 60 

Market  Values  of  the  Precious  Metals.  Experience  of  England. 
Act  of  1774.  A  Tentative  Step.  Gold  Standard  Adopted.  The 
United  States  and  Portugal.  Experience  of  Germany.  Act  of 
1 87 1.  Act  of  1873.  Treasury  Order  of  1900.  Bimetallist  Agita- 
tion Ineffectual.  French  Monetary  Law  of  1803.  Did  not  keep 
the  Market  Ratio  Steady.  The  Latin  Monetary  Union.  Austria- 
Hungary.  Adopts  the  Gold  Standard  in  1892.  Her  Modus 
Operandi.  British  India,  Petition  for  the  Gold  Standard.  The 
Herschel  Commission  of  1893.  Fowler  Committee  of  1898.  Japan 
adopts  the  Gold  Standard.  Her  New  Coinage  Law.  Russia 
adopts  the  Gold  Standard.  New  Russian  Coinage  Law.  Inter- 
national Monetary  Conferences.  Obstacles  to  Bimetallism.  Reca- 
pitulation.   Authorities. 

BOOK  11.    GOVERNMENT   PAPER  MONEY 

CHAPTER  L     COLONIAL  BILLS  OF  CREDIT     ....       79 

First  Bills  of  Credit.  Strife  with  the  Mother  Country.  And  with 
the  Colonial  Governors.  Prohibitions  by  Parliament.  Rhode  Island 
an  Awful  Example.  Testimony  of  Thomas  Paine.  Loans  from 
the  Treasury.  Other  Pretexts  for  Bills  of  Credit.  False  Reports. 
Forcing  Laws.  Usual  Career  of  Bills  of  Credit.  Extending  Time 
for  Redemption.  Counterfeiting.  Depreciation.  Swindling.  Mob 
Law.  Repudiation.  Economic  Effect  of  the  Loan  Bills.  A  Con- 
spiracy of  Landowners.    Recapitulation.    Authorities. 


CONTENTS  vii 

Page 
CHAPTER  II.     REVOLUTIONARY  BILLS  OF  CREDIT.       91 

Franklin's  Warning.  First  Issues.  Pelatiah  Webster.  Early 
Depreciation.  Price  Convention  in  New  England.  Burglary  legal- 
ized. Price  Convention  of  the  Middle  States.  Washington's  First 
Views.  Subsequently  changed.  The  Final  Cataclysm.  Social  Ter- 
rorism. Mutiny  of  Soldiers.  "New Tenor."  Counterfeiting.  Spe- 
cific Supplies.  A  Complete  Failure.  Impressments.  Also  a  Failure. 
"Scales  of  Depreciation."  "Not  worth  a  Continental."  Con- 
tinental Money  considered  as  a  Tax.  Or  as  Confiscation.  The 
Alternative.  Display  of  Luxury  during  the  War.  Post-Revolu- 
tionary Bills.    Recapitulation,    Authorities. 

CHAPTER  III.  THE  GREENBACKS 106 

Treasury  Notes  before  the  Civil  War.  War  Loans  of  1861.  Sus- 
pension of  Specie  Payments.  The  Legal-Tender  Bill,  Bankers 
remonstrate  against  it.  Mr,  Chase  assents  to  it.  The  Bill  passes. 
The  Second  Issue.  The  Coin  Purchase  Act.  Third  Issue.  Depre- 
ciation. Interest-Bearing  Notes.  Compound-Interest  Notes.  Frac- 
tional Currency.  The  10-40  Bonds.  Maturing  Bonds  paid  in  Gold. 
Funding  Clause  repealed.  The  Anti-Gold  Law.  Its  Repeal.  Were 
Legal-Tender  Notes  Necessary  ?  Other  Methods  of  War  Finan- 
ciering. Effect  of  Legal  Tender  on  Wages.  Effect  on  Prices  of  Com- 
modities. First  Trading  in  Gold.  Gold  Exchange  organized.  Gold 
Exchange  Bank.  Gold  Clearings,  A  Commercial  Necessity.  Gam- 
bling Raids.  "  Selling  Short."  Black  Friday.  California  adheres 
to  the  Gold  Standard.  Early  Embarrassments.  Severe  Losses. 
Confusion  in  Business.  Greenbacks  not  Legal  Tender  for  Taxes. 
Rise  of  the  Rate  of  Interest.  Specific  Contract  Law.  Sustained  by 
the  Supreme  Court  of  the  United  States.  Supreme  Court  Deci- 
sions. Gold  Contracts  Enforceable.  The  Hepburn  Case.  The 
Hepburn  Judgment  reversed.  Judge  Strong  on  "Value."  The 
Latest  Decision.  George  Bancroft's  Criticism.  Recapitulation. 
Authorities. 

CHAPTER  IV.  CONFEDERATE  CURRENCY 140 

First  Steps.  A  Produce  Loan.  The  Currency  not  Legal  Tender. 
Failure  to  Tax.  Compulsory  Funding.  Partial  Repudiation.  Final 
Collapse.  Fatal  Mistakes.  State  and  Private  Currency.  Recapit- 
ulation.   Authorities. 


Vlll  CONTENTS 

Page 
CHAPTER  V.     AFTER  THE   WAR 150 

Money  as  an  Educator.  Paying  Bonds  with  Greenbacks.  Policy 
of  Contraction  adopted.  Repealed.  Greenbacks  reissued.  Inflation 
Bill  of  1874.  Vetoed  by  President  Grant.  Specie  Resumption  Act 
of  1875.  Doubts  as  to  its  Meaning.  Attempts  to  repeal  it.  Politi- 
cal Campaign  of  1875.  Resumption  accomplished.  Gold  Imports 
in  1879  ^ri^  1880.  The  $100,000,000  Reserve.  The  Sherman  Act. 
Silver  and  Tariff  Bills  in  1890.  The  Treasury  Deficit.  Gold  Ex- 
ports. The  Currency  Act  of  1900.  Treasury  Divisions  of  Issue 
and  Redemption.  The  "Endless  Chain."  Treasury  Notes  of  1890 
to  be  retired.  Minor  Provisions  of  the  Act  of  1900.  Denomina- 
tions of  Paper  Currency.    Recapitulation. 

CHAPTER   VI.     SILVER    DOLLARS    AND    THE    PANIC 
OF  1893 167 

First  Silver  Agitation.  The  "Crime  of  1873."  Movement  for 
Remonetization.  New  Alignment  of  Parties.  The  Bland  Bill.  The 
Allison  Amendment.  Vetoed  and  passed.  Modus  Operandi.  Slow 
Circulation  of  the  New  Dollars.  Rapid  Movement  in  1879  ^^^ 
1880.  Crisis  in  1884.  Small  Silver  Certificates  introduced.  Panic 
predicted.  The  Act  of  1890.  Gold  Movements  of  1891  and  1892. 
Action  of  Secretary  Foster.  Panic  of  1893.  Commercial  Crises. 
Causes  of  the  Panic.  End  of  the  Silver  Purchasing.  "  Coining  the 
Seigniorage."  Indifference  of  Congress.  Bond  Sales  in  1894.  Bond 
Syndicate  of  1895.  Panic  of  1895.  ^100,000,000  Bond  Sale.  Coin- 
age of  the  Silver  Bullion  in  the  Treasury.  Act  of  1900.  Its  Defect. 
Direct  Redemption  of  the  Silver  Dollar  Desirable.  Recapitulation. 
Authorities  for  Chapters  V  and  VI. 


BOOK   III.    BANKING 

CHAPTER   I.     FUNCTIONS   OF  A   BANK 193 

Original  Meaning  of  the  Term.  A  Manufactory  of  Credit.  Dis- 
counting Commercial  Paper.  Two  Kinds  of  Deposits.  Utility  of 
Bank  Credits.  Limit  to  Bank  Credits.  Bank  Reserves.  Bank 
Notes.  Of  the  Same  Nature  as  Checks.  Issue  of  Notes  Auto- 
matic. Utility  of  Bank  Notes.  Evolution  of  Bank  Notes.  A 
Common-Law  Right.     Why  Interest  is  paid  for  the  Use  of  Bank 


CONTENTS  IX 

Pack 
Notes.    How  Banks  aid  in  the  Work  of  Production,    Recapitula- 
tion.   Authorities. 

CHAPTER  II.     A  BANK  STATEMENT 205 

Loans  and  Discounts.  Accommodation  Paper.  "Cash  Credits." 
Drafts  and  Bills  of  Exchange.  Acceptances.  Bills  of  Lading. 
Letters  of  Credit.  United  States  Bonds.  Other  Interest-Bearing 
Securities.  Real  Estate.  Due  from  Other  Banks.  National  Bank 
Notes.  The  Cash  Reserve.  Bank  Note  Redemption  Fund.  Country 
Bank  Deposits.  Interest  on  Deposits.  Certificates  of  Deposit. 
Certified  Checks.  Cashier's  Checks.  Capital  and  Surplus.  Profits. 
Recapitulation. 

CHAPTER  III.    THE  CLEARING-HOUSE  SYSTEM    .    .     216 

The  Essence  of  Clearing.  The  Old  System.  New  York  Clear- 
ing House.  Preparations  for  Clearing.  The  Operation.  The 
Result.  Present  System  of  Payment.  Magnitude  of  Clearings. 
Other  Varieties  of  Clearing.  Clearing-House  Loan  Certificates. 
"Pooling"  the  Reserves.  Form  of  Certificates.  Effect  on  the 
Public  Mind.  The  Case  of  a  Small  Town.  That  of  a  Large  City. 
Plans  to  Legalize  Bank  Suspension.  Shinplaster  Currency.  A 
Premium  for  Cash.     Recapitulation.     Authorities. 

CHAPTER  IV.   COLONIAL  BANKING 232 

Colonial  Ideas  of  Banking.  The  Bank  of  Amsterdam.  The 
Fallacy  of  Land  Banking.  "  The  Fund  at  Boston  in  New  England." 
The  Massachusetts  "Projection"  of  17 14.  Crude  Conceptions. 
The  New  London  Bank  of  1732.  The  Company  suppressed.  Pri- 
vate Note  Issues  in  173 1.  A  New  Hampshire  Experiment.  The 
Massachusetts  Land  Bank  of  1740.  Its  Note  Issue.  Opposition 
of  Governor  Belcher.  Political  Consequences.  Parliament  takes 
Action.    Mob  Violence.    Recapitulation.    Authorities. 

CHAPTER  V.     EARLY  AMERICAN   BANKS 244 

Bank  of  North  America.  Chartered  by  Congress  in  1781.  Its 
Service  in  the  Revolution.  Rechartered  by  Pennsylvania.  Attacks 
on  the  Bank  after  the  War.  The  Charter  repealed.  And  reenacted. 
Bank  of  Massachusetts.    First  Legal  Restrictions.    Bank  of  New 


X  CONTENTS 

Page 
York.  At  First  Unpopular.  Legal  Restrictions.  Question  of  Small 
Notes.    Restriction  of   Debts   and   Credits.    Other   Prohibitions. 
New  York    Restrictions.    Recapitulation.    Authorities. 

CHAPTER  VI.    FIRST  BANK  OF  THE  UNITED  STATES     254 

Hamilton's  Report.  The  Bank's  Capital.  Regulations  of  its 
Charter.  Constitutionality  of  the  Bill.  Reasons  for  Regulations. 
The  Government  as  a  Shareholder.  Voting  Power  of  Shareholders. 
Other  Provisions.  Great  Financial  Success.  A  Regulator  of  the 
Currency.  Renewal  of  Charter  proposed.  The  Spoils  System. 
Opposition  to  the  New  Charter.  Alleged  Foreign  Influence.  The 
Government's  Shares  in  the  Bank.  Senatorial  Debate.  Charter 
refused,    Mr.  Gallatin's  Opinion.    Recapitulation.    Authorities. 

CHAPTER    VII.      SECOND     BANK    OF    THE     UNITED 
STATES 267 

Financial  Distress  in  18 14.  A  National  Bank  proposed.  The 
Bank  Charter  of  18 16.  Public  Deposits.  Other  Regulations. 
Deposits  payable  in  Specie.  Duties  and  Taxes.  Post  Notes. 
Branch  Drafts.  Penalty  for  Suspension.  Bonus  for  Charter. 
Branch  Banks.  Scandalous  Beginnings,  The  Bank  in  1829. 
Recapitulation. 

CHAPTER  VIII.     THE   BANK   WAR 276 

The  Question  of  a  Recharter.  First  Signs  of  Political  Conflict. 
Isaac  Hill.  Amos  Kendall.  Jackson's  first  Message.  Its  Mis- 
statements. Benefits  of  the  Bank.  Bank  sustained  by  Congress. 
The  Previous  System.  Biddle  and  Ingham.  Jackson's  Message 
of  1830.  Milder  Tone  of  the  President.  Baltimore  Platform  of 
183 1.  Henry  Clay  and  the  Bank.  Affair  of  the  3  Per  Cents.  Mr. 
Biddle's  Duplicity.  The  Charter  passed.  The  Charter  vetoed. 
Jackson's  Victory.  The  Deposits  removed.  The  Pennsylvania 
Charter.  Wild  Speculation.  Final  Collapse  of  the  Bank.  Reca- 
pitulation.   Authorities  for  Chapters  VII  and  VIII. 

CHAPTER  IX.    THE   SUFFOLK  BANK  SYSTEM     .    .    .     291 

Stock  Notes.  Struggle  to  compel  Payment  of  Capital  Stock. 
Chaos  of  Banking  in  New  England.  The  New  England  Bank. 
The  Suffolk  Bank.    Country  Banks  asked  to  redeem  in  Boston. 


CONTENTS  XI 

Page 
The  Forcing  Process.    Basis  of  the  Suffolk  System.    Its  Popu- 
larity and  Success.    Small  Losses.  The  "  Banking  Principle."  The 
"  Currency  Principle."    Specie  Reserve.    Massachusetts  General 
Laws.    Recapitulation.    Authorities. 

CHAPTER  X.    THE  SAFETY  FUND  SYSTEM     ....     303 

Banks  and  Politics.  The  Manhattan  Company.  Joshua  For- 
man.  Safety  Fund  System.  Notes  made  a  Prior  Lien.  Reason 
for  this.  Fraudulent  Overissues.  Faults  of  the  System.  The 
Safety  Fund  in  Canada.    Recapitulation. 

CHAPTER  XL    THE  FREE  BANK  SYSTEM 311 

The  Evils  of  Monopoly.  Political  Revolt.  Free  Banking  Law. 
A  Bad  Beginning.  Abuses  of  Free  Banking.  Faults  of  the  System. 
System  perfected.  Elasticity  of  Note  Issues.  Free  Banks  in  Illinois. 
Final  Collapse.  Indiana.  Wisconsin.  Free  Banking  in  Canada. 
Recapitulation.    Authorities  for  Chapters  X  and  XL 

CHAPTER   XIL     CHAOS    OF   BANKING   IN   THE   XIX 
CENTURY 322 

Speculation  in  Bank  Charters.  Bank  Failures.  Chaos  in  North 
Carolina.  In  Georgia.  In  Michigan.  "  Wild-Cat  Banks."  Coun- 
terfeit and  Spurious  Notes.  Counterfeit  Detectors.  Minor  Abuses. 
Recapitulation.    Authorities. 

CHAPTER  XIII.    SOME  NOTABLE  BANKS 333 

State  Bank  of  Indiana.  Its  Branch  System.  Charter  Regula- 
tions. Circulating  Notes.  The  System  of  Examinations.  Final 
Liquidation.  Crisis  of  1857.  Mortgage  Loans.  George  Smith. 
The  Wisconsin  Marine  and  Fire  Insurance  Co.  Efforts  to  sup- 
press Smith.  *'  George  Sihith's  Money."  The  **  Raison  d'etre." 
Smith's  Retirement.  Louisiana  Bank  Act  of  1842.  Recapitula- 
tion.   Authorities. 

CHAPTER  XIV.    THE  NATIONAL  BANK  SYSTEM    .    .     348 

Origin  of  the  System.  Difficulty  of  passing  the  Bill.  Comp- 
troller. Organization.  Capital  Stock.  Powers.  Deposit  of  Bonds. 
Directors.    Liability  of  Shareholders.    Circulating  Notes.    Their 


XU  CONTENTS 

Page 
Redemption.  Retirement  of  Circulation.  Redemption  of  Failed 
Bank  Notes.  Tax  on  Circulation.  Legal  Reserve.  Usury.  Re- 
strictions. Reports.  State  Taxation.  Bank  Examiners.  Receivers. 
Public  Deposits.  Bank  Statistics,  August  22,  1907.  Recapitu- 
lation. 

CHAPTER   XV.      STATE    BANKS    AND    TRUST    COM- 
PANIES      361 

State  Banks.  Private  Banks.  Cash  Reserves.  Trust  Com- 
panies. New  York  State  Law.  Bank  Notes  as  Reserves.  Bond 
Reserves.  Trust  Companies  and  the  New  York  Clearing  House. 
Mutual  Bank  Examination.  An  Important  Advance  in  Banking 
Science.    Recapitulation. 

CHAPTER  XVI.    FOREIGN  BANKING  SYSTEMS       ...     369 
The  Bank  of  England 

Successful    Beginning.    Monopoly  of    Note    Issues.    The 

"Restriction"  of  1797.    Sir  Robert  Peel.    The  Act  of  1844. 

Suspension  of  the  Bank  Act.    The  Arguments  Pro  and  Con. 

The  Bank  keeps  the  Gold  Reserve  of  the  Nation. 

The  Scotch  Bank  System 

Cash  Credits.  The  Branch  System.  Note  Issues.  Economy 
in  the  Use  of  Gold. 

The  Canadian  Bank  System 

Note  Issues.  Safety  Fund.  Branch  Banks.  Bank  Note 
Inspection. 

The  Bank  of  France 

Note  Issues.  Cash  Reserves.  Suspension  of  Specie  Pay- 
ments. Branches  and  Discounts.  Great  Service  to  the 
Government. 

The  Imperial  Bank  of  Germany 

Its  Organization.  Note  Issues.  The  Elastic  Feature.  Vari- 
ous Provisions.    Dividends.    Recapitulation.    Authorities. 

CHAPTER  XVII.    RECENT  HISTORY 401 

Inflexibility  of  Note  Issues.  Seasonal  Demand  for  Notes. 
Unnecessary  Contraction  and  Expansion.    Extending  the  Public 


CONTENTS  Xlll 

Page 
Debt.  Loss  of  Interest.  Bad  Financiering.  Secretary  Shaw's 
Policies.  Various  Bonds  as  Security  for  Government  Deposits. 
No'  Bank  Reserve  against  Government  Deposits.  Stimulating 
Gold  Imports.  Moving  the  Crops.  Omniscience  in  the  Treasury 
Department. 

CHAPTER  XVIII.    THE  PANIC  OF  1907 411 

The  Knickerbocker  Trust  Company.  The  Run  on  Other  Trust 
Companies.  Drain  on  Bank  Reserves.  Premium  on  Currency. 
Importation  of  Gold.  Action  of  the  Government.  Cause  of  the 
Panic. 

CHAPTER   XIX.    THE   STOCK   EXCHANGE  AND   THE 
MONEY  MARKET 416 

The  Stock  Exchange  Panic.  Distinction  between  Money  and 
Capital.  The  Stock  Exchange  as  a  Promoter.  What  the  Money 
Market  is.  Advances  on  Securities.  A  Cycle  of  Speculation. 
Buying  on  Margin.  Loans  to  Brokers.  Ups  and  Downs  of  Specu- 
lation.   Interest  on  Deposits.    Is  Speculation  an  Evil  ? 

CHAPTER  XX.    PRESENT  PROBLEMS 425 

State  of  Public  Opinion.  Defect  of  the  Bond  Deposit  System. 
No  Panic  in  Foreign  Countries  in  1907.  Branch  Banks.  Their 
Relation  to  Note  Issues.  Legal  Cash  Reserve.  Bank  Notes  as 
Reserves.  Frequent  Redemption  Desirable.  "  Emergency  Circu- 
lation."   The  Proposed  Tax.    The  German  Practice. 

CHAPTER  XXI.    THE  CENTRAL  BANK  QUESTION  .    .     433 

Fortification  of  Credit.  Functions  of  a  Central  Bank.  Its  Note 
Issues.  Drains  on  Bank  Reserves.  How  Banks  drain  Each  Other 
in  the  United  States.  The  Purpose  of  a  Central  Bank  of  Issue.  No 
Motive  for  Favoritism.  Is  a  Central  Bank  Feasible  ?  Advantages 
of  Union.  The  Aldrich  Plan.  For  a  Reserve  Association.  Local 
Associations.  Branches.  Directors.  Restrictions.  Rediscounts. 
Other  Discounts.  Note  Issues.  Advantages  of  the  Plan.  Steady- 
ing Influence.    Objections  Considered.    Recapitulation. 


XIV  CONTENTS 

Page 
APPENDIX  A.    THE  ALDRICH-VREELAND  ACT.   FULL 

TEXT  AND  ANALYSIS 443 

APPENDIX   B.     THE  ALDRICH    PLAN  FOR   THE  RE- 
SERVE ASSOCIATION  OF  AMERICA 457 

APPENDIX  C.     GUARANTEEING  BANK  DEPOSITS  .    .  475 

APPENDIX  D.    THE  FEDERAL  RESERVE   BILL    ...  481 

INDEX 487 


MONEY  AND    BANKING 

BOOK    I 

EVOLUTION  OF  MONEY 

CHAPTER   I 
MONEY  A  COMMODITY 

Money  is  a  commodity  which  mankind  voluntarily  accepts 
in  exchange  for  all  other  commodities  and  services. 

We  are  now  speaking  of  real  money ^  not  of  promises  to  pay 
money.  All  of  our  paper  circulating  medium  and  all  of  our 
Difference  be-  smaller  coins  are,  either  directly  or  indirectly, 
tween  Money  and  promises  to  pay  money.  In  the  case  of  the 
Promises  to  pay.  fQj-j^g^  ^^  promise  is  Stamped  on  it.  In 
the  case  of  the  latter  it  is  merely  expressed  in  the  laws. 
The  difference  between  real  money  and  a  promise  to  pay 
money  is  the  same  as  that  between  a  meal  and  a  meal  ticket, 
or  between  a  trunk  and  a  trunk  check. 

A  commodity  which  is  universally  accepted  as  a  medium 
of  exchange  naturally  becomes  a  standard  of  value^  by 
being  continually  brought  into  comparison  with  other  com- 
modities. 

Aristotle  gives  us  the  following  definition  of  money  and 
account  of  its  origin  : 

It  is  plain  that  in  the  first  society  (that  is,  in  the  household) 
there  was  no  such  thing  as  barter,  but  that  it  took  place  when  the 

I 


%:'';\::    :  .\  'ifiAroLUTioN  of  money 

community  became  enlarged:  for  the  former  had  all  things  in 
common,  while  the  latter,  being  separated,  must  exchange  with 

each  other  according  to  their  needs,  just  as  many 
Aristotle  on  the  barbarous  tribes  now  subsist  by  barter ;  for  these 
Origin  of  Money.  ,  ,  r  ^    \  .         r 

merely  exchange    one   useful   thmg   for   another, 

as,  for  example,  giving  and  receiving  wine  for  grain  and  other 
things  in  like  manner.  This  kind  of  trading  is  not  contrary  to 
nature,  nor  does  it  resemble  a  gainful  occupation,  being  merely 
the  complement  of  one's  natural  independence.  From  this,  never- 
theless, it  came  about  logically  that  as  the  machinery  for  bringing 
in  what  was  wanted,  and  of  sending  out  a  surplus,  was  inconven- 
ient, the  use  of  money  was  devised  as  a  matter  of  necessity.  For 
not  all  the  necessaries  of  life  are  easy  of  carriage  ;  wherefore,  to 
effect  their  exchanges,  men  contrived  something  to  give  and  take 
among  themselves,  which,  being  valuable  in  itself,  had  the  advan- 
tage of  being  easily  passed  from  hand  to  hand  for  the  needs  of 
life  — such  as  iron  or  silver  or  something  else  of  that  kind,  of  which 
they  first  determined  merely  the  size  and  weight,  but  eventually 
put  a  stamp  on  it  in  order  to  save  the  trouble  of  weighing,  for  the 
stamp  was  placed  there  as  the  sign  of  its  value. ^ 

Among  the  things  used  as  money  by  various  people 
within  the  historical  period  are  cacao  beans,  salt,  silk, 
furs,  tobacco,  dried  fish,  wheat,  rice,  olive  oil, 
of^Mone^^"^^  cocoanut  oil,  cotton  cloth,  cowry  shells,  iron, 
copper,  platinum,  nickel,  silver,  and  gold.  It 
would  be  difficult  to  say  what  had  not  been  used  as  money 
at  some  time  or  place.  Our  own  history  furnishes  an  abun- 
dance of  curious  examples,  the  most  instructive  being  the 
tobacco  currency  of  the  colonial  period.  It  may  be  said 
that  Virginia  grew  her  own  money  for  nearly  two  centuries, 
and  Maryland  for  a  century  and  a  half. 

The  first  settlers  of  New  England  found  wampumpeage, 
sometimes  called  wampum  and  sometimes  peage,  in  use 
among  the  aborigines  as  an  article  of  adornment  and  a 
medium   of  exchange.     It   consisted  of  beads  made  from 

1  Politics,  T,  9. 


MONEY  A   COMMODITY  3 

the  inner  whorls  of  certain  shells  found  in  sea  water.  The 
beads  were  polished  and  strung  together  in  belts  or  sashes. 

They  were  of  two   colors,   black  and  white, 
wampum  and         ^^     ^j^   j,     ^^.  ^   ^j       ^         ^^  ^       j^ 

Beaver,  o 

white.     The  early  settlers  of   New  England, 

finding  that  the  fur  trade  with  the  Indians  could  be  carried 
on  with  wampum,  easily  fell  into  the  habit  of  using  it  as 
money.  It  was  practically  redeemable  in  beaver  skins, 
which  were  in  constant  demand  in  Europe.  The  unit  of 
wampum  money  was  the  fathom,  consisting  of  360  white 
beads  worth  sixty  pence  the  fathom.  In  1648  Connecticut 
decreed  that  wampum  should  be  "  strung  suitably  and  not 
small  and  great  vncomely  and  disorderly  mixt  as  formerly  it 
hath  been."  Four  white  beads  passed  as  the  equivalent  of 
a  penny  in  Connecticut,  although  six  were  usually  required 
in  Massachusetts  and  sometimes  eight.  In  the  latter  colony 
wampum  was  at  first  made  legally  receivable  for  debts  to 
the  amount  of  12^.  only.  In  1641  the  limit  was  raised 
to  ^10,  but  only  for  two  years.  It  was  then  reduced  to 
40^-.  It  was  not  receivable  for  taxes  in  Massachusetts. 
The  use  of  wampum  money  extended  southward  as  far  as 
Virginia. 

The  decline  of  the  beaver  trade  brought  wampum  money 
into  disrepute.    When  it  ceased  to  be  exchangeable  in  large 
sums  for  an  article  of  international  trade  the  basis  of  its 
value  was  gone.     Moreover  it  was  extensively  counterfeited, 
and   the   white    beads   were    turned  into    the 
of  wampum^^       more  valuable  black  ones  by  dyeing.     Never- 
theless   it    lingered    in    the    currency   of    the 
colonies  as  small  change  till  the  early  years  of  the  eighteenth 
century.     While  it  was  in  use  it  fluctuated  greatly  in  value. 
The   first  General  Assembly  of   Virginia  met  at  James- 
town July  31,  16 19,  and  the  first  law  passed  was  one  fixing 
the  price  of  tobacco  "  at  three  shillings  the  beste,  and  the 


4  EVOLUTION   OF   MONEY 

second  sorte  at  i8^.   the  pounde."     Tobacco  was  already 

the   local    currency.      In    1642    an    act   was 

in^Yixzi^^^^^     Passed    forbidding    the    making  of  contracts 

payable     in    money,    thus    virtually    making 

tobacco  the  sole  currency.^ 

The  act  of  1642  was  repealed  in  1656,  but  nearly  all  the 
trading  in  the  province  continued  to  be  done  with  tobacco 
as  the  medium  of  exchange. 

In  1628  the  price  of  tobacco  in  silver  had  been  ^s.  6d. 
per  pound  in  Virginia.  The  cultivation  increased  so  rap- 
idly that  in  1631  the  price  had  fallen  to  6d. 
^*Mcf  ^*^^^^^  In  order  to  raise  the  price,  steps  were  taken 
to  restrict  the  amount  grown  and  to  improve 
the  quality.  The  right  to  cultivate  tobacco  was  restricted 
to  1500  plants  per  poll.  Carpenters  and  other  mechanics 
were  not  allowed  to  plant  tobacco  "  or  do  any  other  work 
in  the  ground."  These  measures  were  ineffective.  The 
price  continued  to  fall.  In  1639  it  was  only  3^/.  It  was 
now  enacted  that  half  of  the  good  and  all  of  the  bad  should 
be  destroyed,  and  that  thereafter  all  creditors  should  accept 
40  lb.  for  100  ;  that  the  crop  of  1640  should  not  be  sold  for 
less  than  12^.,  nor  that  in  1641  for  less  than  2s.  per  pound, 
under  penalty  of  forfeiture  of  the  whole  crop.  This  law 
was  ineffectual,  as  the  previous  ones  had  been,  but  it  caused 
much  injustice  between  debtors  and  creditors  by  impairing 
the  obligation  of  existing  contracts.  In  1645  tobacco  was 
worth  only  i^d.  and  in  1665  only  id.  per  pound. 

These  events  teach  us  that  a  commodity  which  is  liable 
to  great  and  sudden  changes  of  supply  is  not  a  desirable 
one  to  be  used  as  money. 

In  the  year  1666  a  treaty  was  negotiated  and  ratified 
between  the  colonies  of  Maryland,  Virginia,  and  Carolina, 
to  stop  planting  tobacco  for  one  year  in  order  to  raise  the 

1  Hening,  I,  262. 


MONEY   A   COMMODITY  5 

price.  This  temporary  suspension  of  planting  made  neces- 
sary some  other  mode  of  paying  debts.  It  was  accordingly 
enacted  that  both  public  dues  and  private  debts  falling  due 
"  in  the  vacant  year  from  planting  "  might  be  paid  in  country 
produce  at  specified  rates. 

In    1683    an  extraordinary   series    of   occurrences   grew, 
out   of   the  low  price    of   tobacco.      Many   people  signed 

petitions  for  a  cessation  of  planting  for  one 

Tobacco  Riots  r       .  r  r   •  •.■!.• 

^  ^gg  year  for  the  purpose  of  mcreasmg  the  price. 

As  the  request  was  not  granted,  they  banded 
themselves  together  and  went  through  the  country  destroy- 
ing tobacco  plants  wherever  found.  The  evil  reached  such 
proportions  that  in  April,  1684,  the  Assembly  passed  a  law 
declaring  that  these  malefactors  had  passed  beyond  the 
bounds  of  riot,  and  that  their  aim  was  the  subversion  of 
the  government.  It  was  enacted  that  if  any  persons,  to 
the  number  of  eight  or  more,  should  go  about  destroying 
tobacco  plants,  they  should  be  adjudged  traitors  and  suffer 
death. 

In  1727  tobacco  notes  were  legalized.  These  were  in 
the  nature  of  certificates  of  deposit  in  government  ware- 
houses issued  by  official  inspectors.  They 
Cu?en^^^^^^^  were  declared  by  law  current  and  payable 
for  all  tobacco  debts  within  the  warehouse 
district  where  they  were  issued.  They  supply  an  early 
example  of  the  distinction  between  money  on  the  one  hand, 
and  government  notes,  or  bank  notes,  on  the  other.  The 
tobacco  in  the  warehouses  was  the  real  medium  of  ex- 
change. The  tobacco  notes  were  orders  payable  to  bearer 
for  the  delivery  of  this  money.  They  were  redeemable 
in  tobacco  of  a  particular  grade,  but  not  in  any  specified 
lots.  Counterfeiting  the  notes  was  made  a  felony.  In  1734 
another  variety  of  currency,  called  "  crop  notes,"  was  intro- 
duced.    These  were  issued  for  particular  casks  of  tobacco, 


O  EVOLUTION    OF   MONEY 

each  cask  being  branded  and  the  marks  specified  on  the 
notes. 

The  circulating  medium  of  the  New  England  colonies  was 
quite  as  fantastic  as  that  of  Virginia.  Merchantable  beaver 
g^j.j  was  legally  receivable  for  debts   at   los.  per 

Massachusetts  pound.  In  1631  the  General  Court  of  Massa- 
currency.  chusetts  ordered  that   corn   should   pass   for 

payment  of  all  debts  at  the  price  it  was  usually  sold  for, 
unless  money  or  beaver  skins  were  expressly  stipulated.  In 
other  words,  a  debt  payable  in  pounds,  shillings,  and  pence 
might  be  paid  at  the  debtor's  option  in  any  one  of  three 
ways:  in  corn  at  the  market  price,  in  beaver  at  los,  per 
pound,  or  in  the  metallic  money  of  England.  For  more 
than  half  a  century  this  order  continued  in  force  and  oper- 
ation, other  things  being  added  to  the  list  from  time  to  time. 

In  1635  musket  balls  were  made  receivable  to  the  extent 
of  i2d.  in  one  payment. 

In  1640  Indian  corn  was  made  current  at  4^-.  per  bushel, 
wheat  at  6s.,  rye  and  barley  at  5^.,  and  peas  at  6s.  Dried 
fish  was  added  to  the  list.  Taxes  might  be  paid  in  these 
articles  and  also  in  cattle,  the  latter  to  be  appraised. 

The  need  of  metallic  currency  was  severely  felt.  In  1654 
it  was  ordered  that  no  coin  should  be  exported,  except  2 ox. 
to  pay  each  one's  traveling  expenses,  on  penalty  of  for- 
feiture of  the  offender's  whole  estate. 

The  cost  of  carrying  the  country  produce  taken  for  taxes 
amounted  to  10  per  cent  of  the  collections.  A  constable 
once  collected  130  bushels  of  peas  as  taxes  in  Springfield. 
He  found  that  he  could  transport  this  portion  of  the  public 
revenue  most  cheaply  by  boat.  Launching  it  on  the  Con- 
necticut River,  he  shipped  so  much  water  on  board  at  the 
falls  that  the  peas  were  all  spoiled.  Thus  we  learn  that 
money  ought  to  be  easy  of  carriage  and  not  liable  to  injury 
by  exposure  to  the  elements. 


MONEY    A    COMMODITY  7 

In  1670  it  was  ordered  for  the  first  time  that  contracts 
made  in  silver  should  be  paid  in  silver. 

In  1675,  during  King  Philip's  war,  the  need  of  metallic 
money  for  public  use  was  so  great  that  a  deduction  of  50 
per  cent  was  offered  on  all  taxes  so  paid. 

The  first  local  currency  of  New  Netherland  was  wampum, 

but  it  was  subordinate  to  the  silver  coinage  of  the  mother 

country ;  that  is,  it  was  reckoned  in  terms  of  that  coinage  as 

fixed  by  the  Dutch  West  India  Company  from 

Early  New  York      ^j^^^^    ^^    ^-^^^       j^  ^^^  ^^^^   ^^^^  ^^    ^-^   ^j^.^^ 
Money. 

beads  for  a  stiver.     Wampum  was  not  made 

in  the  province,  but  was  imported  from  the  east  end  of  Long 

Island,  the  principal  seat  of  production.     It  is  mentioned  in 

a  letter  from  the  Patroons  of  New  Netherlands  to  the  States 

General  in  June,  1634,  as  "being  in  a  manner  the  currency 

of  the  country  with  which  the  produce   of  the  country  is 

paid  for,"  the  produce  of  the  country  being  furs. 

Beaver  soon  became  current  here,  as  in  New  England, 
and  for  the  same  reason,  its  currency  value  being  fixed  by 
the  company  at  8  florins  per  skin.  As  6  wampum  beads 
were  equal  to  i  stiver  and  20  stivers  to  i  florin,  and  8 
florins  to  i  skin,  the  ratio  of  wampum  to  beaver  was  960 
to  I.  The  market  ratio  did  not  coincide  with  the  legal 
ratio  very  long.  Nor  was  the  legal  ratio  of  either  wampum 
or  beaver  to  silver  maintained  ;  for,  in  1656,  Director  Stuy- 
vesant  wrote  to  the  company  urging  that  beaver  be  rated 
at  6  florins  instead  of  8,  and  wampum  at  8  for  a  stiver 
instead  of  6,  as  these  rates  were  nearer  the  commercial 
values. 

In    1 7 19    the    Assembly    of    South    Carolina   made    rice 

receivable  for  taxes,  "  to  be  delivered  in  good  barrels  upon 

the   bay   in  Charlestown."     In  the  following 
Rice  Currency.  ^^        r     •  ^      •     ^ 

year  a  tax  of  1,200,000  lb.  of  rice  was  levied, 

and  commissioners  were  appointed  to  issue  rice  orders  to 


8  EVOLUTION    OF   MONEY 

public  creditors,  in  anticipation  of  collection,  at  the  rate  of 
30^.  per  100  lb.,  in  the  following  form : 

"  This  order  entitles  the  bearer  to  one  hundred  weight  of 
well-cleaned  merchantable  rice  to  be  paid  to  the  commis- 
sioners that  receive  the  tax  on  the  second  Tuesday  in 
March,   1723." 

Rice  orders  were  made  receivable  for  all  purposes,  and 
counterfeiting  was  made  felony  without  benefit  of  clergy. 

In  eastern  Tennessee  and  Kentucky,  early  in  the  nine- 
teenth century,  deer  skins  and  raccoon  skins  were  receivable 
for  taxes  and  served  the  purposes  of  currency. 

When  California  was  first  invaded  by  gold  seekers  there 
were  a  few  Mexican  coins  in  circulation  there,  not  nearly 
sufficient  to  answer  the  needs  of  the  growing  community. 
The  immigrants  brought  more  or  less  metallic  money  with 
them.  The  smaller  coins  were  those  of  many 
Early  California  (different  countries,  chiefly  Spanish.  For  want 
of  sufficient  coins,  the  first  trading  was  done 
largely  with  gold  dust,  sometimes  by  weighing  it  in  scales, 
sometimes  by  guesswork.  A  "pinch"  of  gold  dust  about 
as  large  as  a  pinch  of  snuff  had  a  current  value  and  was  a 
common  measure  in  places  where  there  was  no  means  of 
weighing.  At  a  public  meeting  in  San  Francisco,  Septem- 
ber 9,  1848,  it  was  resolved  by  unanimous  vote  that  $16 
per  ounce  was  a  fair  price  for  placer  gold.  This  rate  was 
at  once  adopted  in  all  business  transactions.  By  and  by  pri- 
vate coiners  of  gold  came  into  the  field.  The  Legislature 
was  at  first  alarmed  by  the  appearance  of  these  unaccus- 
tomed pieces,  and  passed  a  law  to  prohibit  their  circulation 
and  to  close  the  shops  where  they  were  made.  It  was  soon 
found,  however,  that  they  were  a  great  convenience.  Then 
the  law  was  repealed.  Several  establishments  immediately 
went  to  work  assaying  and  coining  gold.  One  of  these 
was  at  Salt  Lake  City,  whose  productions  were  known  as 


MONEY   A    COMMODITY  9 

Mormon  coins.  Only  one  of  these  establishments,  that  of 
Moffat  &  Co.,  of  San  Francisco,  conformed  exactly  to  the 
government    standard    of    weight    and    fineness.      All   the 

others,  however,  including  the  Mormon  ones, 
^nd'^^^siu^T^"      circulated  freely,  and  were  received  on  deposit 

by  the  banking  houses  until  the  government 
set  up  an  assay  office  and  began  to  stamp  octagonal  pieces  of 
$50,  called  "slugs,"  and  afterwards  those  of  $20  each.  This 
was  done  in  1851  ;  the  San  Francisco  mint  was  not  ready 
till  1854.  The  Moffat  coins  continued  to  circulate  after  the 
mint  had  gone  into  operation,  since  everybody  had  confi- 
dence in  their  goodness.  It  is  estimated  that  $50,000,000 
of  private  coins  were  struck.  They  were  received  in  the 
Atlantic  cities  at  their  assay  vafue  only. 

The  foregoing  illustrations  drawn  from  our  own  history 
serve  to  explain  the  nature  of  money  and  the  processes  by 

which  mankind  learns  to  distinguish  between 
PrhfcMes  good    money   and    bad.     Men    discover   the 

need  of  a  common  medium  of  exchange  as 
soon  as  society  emerges  from  the  patriarchal  state,  where 
each  group  of  persons  is  sufficient  unto  itself.  They  learn 
by  experience  that  one  who  wants  wheat,  and  has  only  skins 
to  exchange  for  it,  must  meet  somebody  who  has  wheat  and 
wants  skins,  and  that  much  time  and  labor  may  be  lost 
before  the  two  can  find  each  other.  Then  more  time  may 
be  lost  before  they  can  agree  upon  the  ratio  at  which  the 
two  articles  should  be  exchanged  for  each  other.  The  few 
and  simple  words  with  which  Aristotle  has  treated  this 
subject  cannot  be  bettered.  Whole  tomes  have  been 
written  to  say  the  same  things  and  have  ended  without 
saying  them. 

Money  is  always  the  product  of  labor.  Nobody  would 
give  that  which  has  cost  him  labor,  in  exchange  for  some- 
thing which  he  could  obtain  without  labor. 


lO  EVOLUTION    OF    MONEY 

All  the  things  that  have  been  used  as  money  have  pos- 
sessed value  for  other  purposes,  and  this  other  value  led  to 
their  use  as  money.  Hence  it  may  be  said  that  the  value 
of  any  standard  money  depends  upon  its  utility  for  this  and 

other  purposes  combined  and  is  measured 
of  Gold  "*  ^y    ^^^    demand   for    those    purposes.     Gold 

would  never  have  been  brought  into  use  as 
money  if  it  had  not  possessed  certain  qualities  of  beauty, 
portability,  durability,  etc.,  which  caused  it  to  be  prized  as 
an  article  of  adornment. 

All  trade  is  barter,  or  the  exchange  of  property  and  ser- 
vice for  other  property  and  service.  This  is  true  when  wheat 
is  exchanged  for  gold,  and  gold  for  cloth.  Here  are  two 
acts  of  barter  to  accomplish*  one  result,  namely,  the  procur- 
ing of  cloth  for  wheat.  The  word  "  barter  "  is  commonly 
used  to  signify  the  exchange  of  property  without  the  use 

of  money.      It  must  be  borne  in  mind,  how- 

Aii  Trade  is  ever,  that  all  trade  is  barter,  even  when  the 

Barter.  '  ' 

precious  metals  are  employed  as  intermediaries 

—  the  latter  being   articles  of   barter  also,  and   possessing 

the  same  value  as  the  things  for  which  they  are  exchanged. 

TAe  whole  science  of  money  hinges  07i  this  fact. 

Objections    to    tobacco    money  in    Virginia    and   to    the 

variegated  colonial  currency  of  New  England  are  obvious. 

They  were  inconvenient  in  every  way.  In 
Portability.  ,       "^  ,  ,  .,  i  , 

the  first  place,  they  were  not  easily  portable. 

It  cost  £2>  ^^'  i"   1662  for  cartage  of  the  proceeds  of  the 

tax  levy  of  the  town  of  Ipswich,  amounting  to  ^70  6^.  Zd. 

In  Virginia  there  was  a  difference  in  the  value  of  tobacco 

notes    according   to   the   location   of   the   warehouse   where 

the  tobacco  was   situated.     This  amounted  in   some  cases 

to  \os.  per  cwt. 

Another  objection  is  found  in  the  fluctuations  in  value  of 

these  currencies.     The  range  of  tobacco  prices  in  Virginia 


MONEY   A    COMMODITY  II 

from    1619    to    1775    was    from    y.   6d.    down    to    id   per 

pound.     We  have  seen  what   strenuous  efforts  were  made 

by  the  tobacco-planting  colonies  to  restrict  the 

production    and    what   distress   and    disorder 

were  caused  by  their  inability  to  do  so. 

Another  inconvenience  attending  these  media  of  exchange 

was  the  difference  in   value   between   different  lots  of  the 

same  article  at  the  same  place.     Tobacco,  even  when  up  to 

standard,  was  of  four  different  kinds,  described  in  the  laws 

as  sweet-scented,  Oronoko,  leaf,  and  stemmed. 
Uniformity. 

Then  there  were  differences  in  the  inspection, 

some  inspectors  being  more  skillful  and  more  strict  than 
others,  whereby  their  receipts  or  notes  came  to  have  a  higher 
price  than  others.  There  were  differences  also  arising  from 
different  seasons  and  different  cultivators.  A  large  part  of 
the  legislation  of  both  Virginia  and  Maryland  was  directed 
to  the  suppression  of  "trash."  No  substance  can  be  con- 
sidered suitable  for  the  purposes  of  money,  if  different 
parcels  of  it  are  of  different  degrees  of  goodness. 

Want  of  durability  was  another  objection  to  all  of  these 

thinsfs.     There  was  so   much   shrinkage  and 

Durability.  .       ^.  .        .  ,  ,  ,  .  , 

deterioration  in  tobacco  that  the  notes  issued 

against  it  could  not  be  safely  kept  more  than  one  year. 

Some  of  the  articles  used  as  money  in  the  colonial  period 

could    be    divided    and    subdivided    without 

Divisibility.  .  r     ■,     •  1  ,  -i  1 

losing  any  part  of  their  value,  while  others 
could  not.  Grain  and  tobacco  could  be  so  divided.  Beaver 
skins  could  not.  For  the  purposes  of  exactitude  divisibility 
is  necessary.  No  article  which  does  not  possess  this  quality 
can  be  considered  a  good  medium  of  exchange. 

It  is  not  absolutely  necessary  that  the  substance  used  as 
money  should  be  coined.  Gold  and  silver  were  used  as 
money  before  they  were  coined  —  and  then  they  passed  by 
weight.     All   that   coining  does   is   to   save   the   trouble  of 


12  EVOLUTION   OF   MONEY 

frequent  weighing  and  assaying.     Accordingly  it  is  desirable 

that  the  substance   of  which   money   is    composed  should 

be  one  which  can  receive   and  retain  a  stamp.     None  of 

the    substances    which    the    early    American 
Cognizability.  j    •      v  r  .u 

colonies  used  m  lieu  of  the  precious  metals 

answered  this  requirement.  The  putting  of  wampum  shells 
together  in  parcels  equal  to  one  penny,  and  higher  denom- 
inations, easily  recognized,  was  something  akin  to  coinage. 
So  also  was  the  marking  of  a  hogshead  of  tobacco  by  an 
inspector.  When  so  marked  it  would  pass  without  reweigh- 
ing  or  reexamination.  The  stamp  had  here  become  the 
sign  of  value,  but  the  tobacco  itself  could  not  be  stamped 
because  the  substance  was  not  suitable  for  receiving  and 
retaining  an  impression. 

All  writers  are  agreed  that  the  six  requisites  mentioned 
above  are  essential  to  a  good  kind  of  money,  viz.,  portability, 
uniformity,  durability,  divisibility,  cognizability,  and  stability 
of  value. 

Long  experience  has  taught  mankind  that  these  qualities 
are  best  embodied  in  the  metal  gold. 

It  must  not  be  assumed  that  gold  is  absolutely  stable  in 

value.     When  we  speak  of  the  value  of  one  thing  which 

measures  all  values,  we  mean  its  purchasing 

Gold  not  wholly    power  in  terms  of  those  commodities  whose 

Free  from  Vari-  ,       .  ....  ,,     ,     , 

ations  in  Value.    Supply    IS    unlimited,    or    not    controlled    by 

monopoly.     The  value  of  gold  thus  measured 

is  subject  to  variations,  but  it  is   impossible  to   measure 

them  with  accuracy,  even  when  we  compare  prices  during 

long  intervals  of  time.     We  are  concerned  at  present  only 

with  the  comparative  steadiness  of  value  of  different  things, 

as,  for  example,  gold  and  tobacco.     If  gold  is  subject  to  fewer 

changes  of  purchasing  power  than  tobacco,  it  is  better  fitted 

to  serve  the  purposes   of  money  and  will  sooner  or  later 

supplant  it  in  that  function.     If  it  is  subject  to  fewer  changes 


MONEY   A   COMMODITY  1 3 

than  any  other  known  substance,  it  will  supersede  all  others. 
The  fact  that  it  is  not  wholly  free  from  variation  itself  will 
not  prevent  it  from  becoming  the  sole  and  universal  money 
of  civilized  mankind. 

The  durability  of  gold  is  one  of  the  most  potent  factors 
contributing  to  its  stability  of  value.  Gold  does  not  deterio- 
rate with  age,  and  its  loss  by  abrasion  is  slight.  The  pro- 
duction of  each  year  is  added  to  the  accumulations  of  the 
past.  Hence  the  mass  in  existence  at  any  time  is  so  great 
that  its  value  is  not  perceptibly  affected  by  any  change  in 
the  output  of  a  single  year  or  short  series  of  years.  This 
A  standard  mass  may  be  likened  to  the  ballast  which  gives 

of  Deferred  steadiness  to  a  ship.     Gold  thus  becomes  a 

Payments.  good    standard    of   deferred  payments.      The 

desideratum  here  is  that  the  value  of  the  future  payment 
shall  be  as  nearly  as  possible  equal  to  that  of  a  present 
payment,  although  absolute  equality  cannot  be  expected. 

The  durability  of  gold  makes  it  also  a  convenient  store  of 
value.  Gold  coins  or  ornaments  that  have  been  buried 
thousands  of  years  are  of  no  less  value  than  gold  fresh  from 
the  mine. 

Money  is  a  product  of  evolution,  a  result  of  the  ages. 
The  better  has  gradually  crowded  the  worse  out  of  existence. 
Our  own  history  forms  no  exception  to  this 
of°Evoiut^n^^^*  ^"^^'  ^^^  although  our  colonial  ancestors  for  a 
time  went  back  to  a  system  almost  as  rude  as 
that  of  the  Homeric  period,  they  eventually  abandoned  it 
and  resumed  metallic  money,  which  always  served  as  a 
mental  standard  even  when  it  was  not  a  legal  one.  It 
is  a  fact  of  prime  importance  —  we  meet  it  everywhere 
in  colonial  history  —  that  in  all  trading,  whether  the 
medium  of  exchange  was  wampum,  beaver,  tobacco,  or 
what  not,  there  was  a  mental  reference  to  metallic  money, 
most  commonly  silver.      In  other  words,  silver,  although 


14  EVOLUTION    OF   MONEY 

a  latent  standard,  was  the  real  standard  at  all  times  and 
places. 

The  question  may  be  asked,  Why  did  our  ancestors  endure 
the  burden  of  an  inferior  kind  of  money  so  long,  when  they 
knew  that  it  was  inferior?  The  answer  is  that  a  metallic 
money  is  an  expensive  tool  acquired  by  a  community  at  a 
considerable  cost  and  sacrifice.  The  early  settlers  had  very 
little  capital,  and  preferred  to  put  as  little  of  it  as  possible 
into  the  shape  of  money,  and  as  much  as  possible  into  food, 
clothing,  and  implements.  They  could  not  have  both  a 
metallic  currency  and  an  axe.  They  chose  the  axe  as  being 
more  important  to  them,  and  got  along  without  the  coin. 
Hence  the  prevalence  of  paper  money.  Moreover,  the  one 
form  of  ready  capital  which  was  acceptable  to  all,  and  there- 
fore could  be  used  as  a  medium  of  exchange,  was  a  ready 
article  of  export,  e.g.^  in  New  York,  beaver  skins  ;  in  Vir- 
ginia, tobacco ;  in  South  Carolina,  rice,  etc.  These  were 
the  natural  money  in  those  sections.  Silver  could  not  be 
kept  in  circulation,  as  it  was  inevitably  exported  to  be  ex- 
changed for  more  valuable  kinds  of  capital  (axe,  food, 
clothing).  The  faster  it  was  coined  or  imported  from  the 
West  Indies,  the  faster  it  left  to  buy  goods  abroad. 

RECAPITULATION 

Money  is  a  common  measure  of  value,  a  medium  of 
exchange,  and  a  standard  of  deferred  payments.  Like  most 
other  commodities,  it  is  the  product  of  labor.  Any  portable 
article  may  answer  the  purpose  of  money ;  some  com- 
modities are  more  convenient  than  others.  Mankind  has 
experimented  with  many  different  ones,  and  has  selected 
gold  as  the  best.  The  selection  has  been  made  by  tacit 
agreement,  not  by  convention. 

All  trade  is  essentially  barter,  even  when  carried  on  by 
the  use  of  gold. 


MONEY   A    COMMODITY  1 5 

The  value  of  any  standard  money  depends  upon  its  utility 
or  usefulness^  i.e.,  upon  what  the  consumers  of  the  com- 
modity are  willing  to  pay  for  it  for  other  than  monetary 
uses  ;  for  instance,  for  ornament. 

In  every  exchange  the  gold  is  of  the  same  value  as  the 
thing  for  which  it  is  exchanged,  or  is  so  considered  by  the 
traders. 

The  requisites  of  a  good  kind  of  money  are  portability, 
homogeneity,  durability,  divisibility,  cognizability,  and  sta- 
bility of  value.  These  requisites  are  found  to  exist  in  the 
greatest  perfection  in  gold. 

By  the  value  of  gold  we  mean  the  quantity  of  other  com- 
modities that  it  will  exchange  for,  at  a  given  time.  As  value 
is  a  relation  existing  between  different  things,  it  follows  that 
variations  of  value  may  arise  from  causes  affecting  either 
of  them. 

Gold  is  not  wholly  free  from  variations  of  value,  but  is 
subject  to  fewer  changes  than  any  other  substance  which  is 
fitted  to  be  used  as  money. 

Authorities 

Felt's  Historical  Account  of  Massachusetts  Currency. 

Bronson's  Historical  Account  of  Connecticut  Currency,  etc. 

Sumner's  History  of  A7nerican  Currency. 

Weeden's  Economic  and  Social  Histoiy  of  New  England. 

Documents  Relating  to  the  Colonial  History  of  New  York. 

Brock's  History  of  Tobacco  (in  Vol.  Ill,  Tenth  U.  S.  Census) 

Hening's  Statutes  of  Virginia. 

Ridgway's  Oi'igin  of  Cttrrency  atid  Weight  Standards. 

Hill's  Handbook  of  Greek  and  Roman  Coins  (London,  1899). 


CHAPTER    II 

COINAGE 

Coinage  is  the  process  of  identifying,  by  stamping,  a 
piece  of  metal  intended  to  be  used  as  money.  Coins  are 
of  two  kinds,  namely  : 

I.  Those  made  by  the  government  for  private  persons, 
from  metal  deposited  by  them,  without  limit  as  to  quantity, 
and  full  legal  tender. 

II.  Subsidiary  coins  made  by  the  government  for  itself, 
such  coins  being  restricted  in  quantity,  and  sold  to  private 
persons  at  more  than  cost,  and  being  usually  limited  legal 
tender. . 

As  regards  coins  of  the  first  class,  the  government's 
stamp  is  merely  a  certification  of  the  weight  and  fineness  of 
the  metal  composing  them.  The  prime  requisites  of  such 
a  coinage  are : 

1.  That  the  coins  shall  contain  exactly  the  amount  of  fine 
metal  that  the  law  prescribes ; 

2.  That  they  shall  be  easily  recognized; 

3.  That  they  shall  not  be  easily  counterfeited  or  altered  ; 

4.  That  they  shall  not  be  easily  abraded  by  ordinary  use. 
The  word  "  subsidiary  "  is  usually  applied  to  coins  which 

constitute  the  small  change  of  a  country  and  which  are 
legal    tender   only  for  limited  amounts.     In 

Token  S^s^.""^  the  United  States  the  silver  dollar  must  be 
classed  as  subsidiary  also ;  for,  although  it  is 

full  legal  tender,  the  government  does  not  coin  it  for  private 

individuals  as  it  coins  gold.    It  is  subsidiary,  or  subordinate, 

16 


COINAGE  17 

to  gold  coins.  It  passes  for  much  more  than  the  value 
of  the  metal  contained  in  it.  Professor  Taussig  has  fitly 
applied  the  term  "  large  change  "  to  the  silver  dollar.  Coins 
made  of  copper  or  other  base  metal  are  called  "  token  "  coins. 
They  are  subsidiary  coins  for  the  smallest  transactions. 

Subsidiary  coins,  however  much  their  metallic  value  may 
fall  below  their  nominal  value,  may  be  kept  at  par  either  by 
restricting  their  quantity,  or  by  redeeming  them  on  demand. 
If  the  quantity  is  restricted  to  the  actual  needs  of  the  coun- 
try for  small  change,  they  will  be  at  par  because  they  are 
among  the  necessities  of  life.  Our  government  redeems  its 
coins  smaller  than  one  dollar  when  presented  in  sums  not 
less  than  twenty  dollars. 

By  the  coinage  act  of  1873  the  weight  of  our  subsidiary 
coins  was  increased  slightly,  to  make  them  correspond  with  the 
legal-tender  silver  of  France.  Two  half  dollars  (384  grains) 
were  raised  to  25  grams  (385.8  grains),  equal  to  the  five- 
franc  piece.     This  change  was  of  no  practical  importance. 

If  subsidiary  silver  coins  circulate  at  a  value  which  is 
largely  imaginary,  the  question  may  be  asked.  Why  not 
make  them  of  some  other  metal,  or  even  of 
M^toi^^^  °^  paper  ?  There  are  no  reasons  except  custom 
and  convenience.  A  coin  not  heavier  than  a 
half  dollar  is  more  convenient  than  a  piece  of  paper  ;  it  is 
cleaner,  and  in  the  long  run  is  probably  cheaper,  as  it  does 
not  require  frequent  renewal.  A  cheaper  coin  might  be 
made  out  of  some  other  metal,  but  it  is  generally  best  to 
conform  to  the  habits  of  the  people.  Having  been  always 
accustomed  to  a  silver  subsidiary  coinage,  no  good  reason 
is  apparent  why  we  should  depart  from  it. 

The  shape  of  coins  is  usually  circular,  but  some  are 
square,  others  oblong,  others  cubical.  Many  ancient  coins 
were  dish-shaped ;  others  in  the  form  of  rings.  The  first 
coins  struck  by  the  government  in  California  were  octagonal. 


1 8  EVOLUTION    OF   MONEY 

The   copper  coins   of    China,   called    "cash,"  have  square 

holes  in  the  center  by  which  they  are  strung  on  a  wire  and 

hung  over   the   owner's  neck.     The   objects 
Shape  of  Coins.  ,         •         ,  .       ,  .  , 

to  be  aimed  at  in  determining  the  shape  of  a 

coin  are  freedom  from  abrasion,  exemption  from  alteration, 
and  convenience  in  handling.  Modern  commerce  tends  to 
minimize  the  use  of  gold  except  to  settle  international  bal- 
ances. For  this  purpose  fine  gold  bars  are  best,  as  they 
are  subject  to  hardly  any  abrasion  and  are  much  more 
convenient  to  bankers  than  ordinary  coins. 

Coins  have  been  made,  at  different  times  and  places,  of 
iron,  lead,  tin,  brass,  copper,  nickel,  platinum,  silver,  and 
gold.  There  were  coins  of  electrum  in  the  ancient  world. 
This  was  a  mixture  of  silver  and  gold  found  in  a  natural 
state  in  the  Tmolus  Mountains  in  Asia  Minor  and  else- 
where.    Specimens  found  in  the  Tmolus  range 

Ma.'tBria.ls 

in   modern   times  have   yielded  73   per  cent 

gold  and  27  per  cent  silver.     Electrum  was  also  produced 

artificially,  with  a  larger  proportion  of  silver,   in  order  to 

debase  the  currency. 

In  early  Rome  small  payments  were  made  by  tale  (/>., 

by  counting),  and  large  ones  by  weight.     The  Latin  word 

pendo.  from  which  our  words  "  compensation," 
Weight  Coins.  '       .  ,,  ,  .  ,,,,., 

"  expenditure,      and  "  stipend      are  derived, 

means  to  weigh.     The  shekel,  the  talent,  the  drachma,  the 

pound,  the  penny,  the  peso,  the  livre,  the  franc,  and  the 

mark   were   originally   the   names    of   weights.      They   are 

instances  of  the  transference  of  the  name  of  a  weight  to 

a  coin. 

A  standard  is  a  measure,  by  comparison  with  which  the 

length,  size,  weight,  capacity,  fineness,  value  of  other  things 

is  determined,  as  a  standard  inch,  a  standard  gallon,  etc. 

It  is  proper,  therefore,  to  speak  of  a  standard  of  weight,  a 

standard  of  fineness,  a  standard  of  value.     Our  law  says 


COINAGE  19 

that  the  dollar  composed  of  25^%  grains  of  gold,  nine-tenths 
fine,  shall  be  the  standard  unit  of  value,  and  that  ten  times 
this  amount  shall  be  the  eagle,  etc.    The  amount  of  fine  gold 

in  the  dollar  is  23.22  grains.  The  smallest 
sta^ndarT  ^^       ^^^^   ^^^^   "^^  produced  at  the  mint  is  the 

quarter  eagle  (two  dollars  and  a  half)  of  the 
standard  weight  of  64J  grains.  The  gold  dollar  is  too 
small  a  piece  for  convenient  use.  Its  coinage  was  discon- 
tinued by  the  act  of  September  26,  1890.  The  coins 
now  authorized  to  be  struck  at  the  mint  of  the  United 
States  are  the  gold  quarter  eagle,  half  eagle,  eagle,  and 
double  eagle  ;  the  silver  dollar,  the  half  dollar,  the  quarter 
dollar,  and  the  dime  ;  the  five-cent  piece  of  nickel  and 
copper,  and  the  one-cent  piece  of  copper. 

We  sometimes  read  of  an  "  ideal  dollar,"  a  phrase  imply- 
ing that  there  may  be  a  dollar  whose  value  is  not  embodied 

in  any  tangible  substance,  but  is  purely  a 
lar ''' im^os^ibie    "cental  conception.  This  is  impossible.  Money 

must  be  something   which   shall    serve    as  a 

medium  of  exchange.    There  may  be  as  many  different  ideas 

as  there  are  different  people.     How  should  we  choose  an 

umpire  to  furnish  ideas  of  the  relative  values  of  different 

kinds  of  property?     Yet  the  Supreme  Court  of  the  United 

States,  in  the  Legal  Tefider  Cases^  gravely  maintained  that 

"  value  is  an  ideal  thing  "  and  that  "  the  gold  or  silver  thing 

we  call  a  dollar  is  in  no  sense  a  standard  of  a  dollar." 

The  government  receives  all  the  gold  deposited  at  the 

mint  by  private  individuals  and  converts  it  into  coin  or  bars 

free  of  charge.  All  silver,  nickel,  and  copper 
Seigniorage.  .  ,      ,         ,  r  • 

coms  are  made  by  the  government  from  its 

own  metal  and  are  sold  to  the  public  for  gold  or  its  equiv- 
alent. The  profit  which  the  government  makes  on  such 
sales  is  called  *' seigniorage."  It  is  the  difference  between 
the  cost  of  the  bullion  and  the  price  received  for  the  coins. 


20  EVOLUTION   OF   MONEY 

The  same  term  is  applied  to  any  charge  which  a  govern- 
ment makes  for  coining  a  metal  for  private  individuals. 
Formerly  the  seigniorage  on  silver  subsidiary  coins  was 
only  5  to  7  per  cent.  Since  the  great  decline  in  the  price 
of  silver  took  place,  it  has  become  more  than  loo  per  cent. 
Formerly  the  government  could  buy  only  sixteen  pounds  of 
silver  bullion  with  one  pound  of  gold.  Now  it  can  buy 
more  than  thirty-five  pounds  for  the  same  money. 

Although  the  law  contemplates  the  deposit  of  gold  bullion 
at  the  mint,  or  assay  offices,  of  the  United  States,  and  the 

coinage  of  the  same  for  the  depositor^  yet 
BuuTon' ""*  ^°^^    practically    the    Treasury    buys    the    bullion 

and  pays  for  it.  The  practice  of  the  assay 
office  in  paying  for  gold  varies  according  to  the  kind  of 
bullion  in  the  deposit.  A  depositor  of  bars  from  known 
assayers,  or  smelters,  or  of  foreign  coin  of  which  the  fine- 
ness can  be  readily  approximated,  is  allowed  at  once  90 
per  cent  of  the  value  ascertained  by  weight  and  calculation 
of  the  fineness.  The  balance  is  paid  after  melting  and 
assaying.  When  the  deposit  is  small,  or  when  bullion  is 
tendered  without  well-known  "  ear-marks,"  no  advance  pay- 
ment is  made,  but  the  full  payment  is  made  after  assaying 
without  waiting  for  coinage.  Having  bought  the  bullion, 
the  director  of  the  mint  determines  what  portion  shall  be 
coined  and  what  portion  converted  into  bars.  A  certain 
portion  is  always  converted  into  "  fine  bars "  for  commer- 
cial use,  the  remainder  into  mint  bars  {^-^  fine)  suitable 
for  coinage. 

The  successive  steps  in  the  making  of  coins  are  :  (i) 
assaying,  (2)  refining,  (3)  alloying,  (4)  coining.  The  bul- 
lion is  first  melted  in  a  crucible.  While  in  the  molten  state 
it  is  stirred  until  thoroughly  mixed.  It  is  then  allowed  to 
cool  in  the  form  of  a  brick.  Small  pieces  are  clipped  from 
two  corners  of  the  brick  most  distant  from  each  other  and 


COINAGE  21 

given  to  two  different  assayers  to  test  the  fineness  of  the 
metal.     If  their  tests  do  not  agree  within  a  certain  fraction, 

the  brick  is  returned  to  the  melting  pot  and 
Ass3.viii£r  ' 

the  process  repeated.  When  the  test  is  sat- 
isfactory and  the  amount  of  foreign  substance  is  known, 
the  whole  of  the  impurity  is  removed  by  chemical  means. 
Then  the  requisite  amount  of  alloy  is  added,  by  remelting 
and  mixing,  to  harden  the  mass.  Thus,  to  nine  pounds  of 
pure  gold  one  pound  of  copper  is  added,  so  that  the  coins 
shall  be  nine-tenths  fine. 

The  bullion  is  rolled  into  strips  or  ribbons  a  little  wider 
than  the   coin   to   be    struck.     It   is   then   "  drawn "   in   a 

machine  which  reduces  it  to  the  thickness  of 

the  coin.  The  strips  are  then  passed  through 
another  machine,  which  cuts  out  of  them  circular  pieces,  of 
the  proper  size,  called  "blanks."  Each  blank  is  examined 
by  an  expert  both  by  weighing  and  by  sounding.  If  one  is 
found  too  light,  or  if  it  does  not  "ring  true,"  it  is  returned 
to  the  melting  pot.  If  it  is  too  heavy,  the  excess  of  metal  is 
removed  by  filing. 

The  blanks  are  sent  to  a  machine  by  which  a  slight 
rim  is  raised  around  the  edge  of  the  piece  on  both  sides, 
so  that  its  weight  shall  rest  on  the  rim  and  not  on  the 
whole  surface  of  the  coin,  in  order  to  minimize  the  abra- 
sion. This  process  is  called  "milling."  The  blanks  are 
then  put  in  a  cylindrical  case  and  sent  to  the  coining  machine. 
At  each  revolution  of  the  machine  one  blank  drops  from 
the  bottom  of  the  cylinder,  is  seized  and  conveyed  to  a 
sunken  steel  bed  which  contains  a  die  that  prints  one  sur- 
face of  the  coin.  This  bed  has  a  serrated  edge  or  "  collar." 
Directly  above  this  sunken  die  is  a  steel  stamp  containing  a 
die  which  prints  the  other  surface  of  the  coin.  This  stamp 
descends  on  the  blank  underneath  with  sufficient  force  to 
impress  upon  it  the  letters  and  figures  of  both  surfaces  of 


22  EVOLUTION   OF    MONEY 

the  coin.  The  pressure  also  squeezes  the  coin  against  the 
serrated  collar,  producing  an  indentation  on  the  edge  of 
the  coin,  the  object  of  which  is  to  prevent  any  clandes- 
tine removal  of  metal.  If  a  piece  were  clipped  from  the 
edge,  or  if  any  portion  were  removed  by  filing,  the  fraud 
would  be  detected  by  the  absence  or  irregularity  of  the 
indentations. 

Experience  has  shown  that  the  work  of  coining  cannot  be 
safely  intrusted  to  private  enterprise.  Between  the  years 
1830  and  i860  there  were  numerous  private 
SldmisSJre.''^  manufactories  of  gold  coins  in  the  United 
States.  They  were  situated  in  Georgia,  North 
Carolina,  California,  Oregon,  Utah,  and  Colorado.-^  They 
turned  out  coins  of  varying  goodness,  all  purporting,  how- 
ever, to  be  of  the  weight  and  fineness  of  the  government's 
coins.  They  were  not  counterfeits.  They  did  not  imitate  the 
designs  on  the  coins  of  the  United  States.  Many  of  them 
bore  the  names  and  places  of  business  of  the  manufacturers. 
They  were  ingots  purporting  to  be  worth  the  number  of  dol- 
lars stamped  on  them.     The  value  of  these  five-dollar  pieces 

1  The  mint  at  Philadelphia  has  upwards  of  sixty  specimens  of  private 
gold  coins  and  many  copper  ones  which  circulated  in  the  United  States 
at  one  time  and  another.  Examples  of  these  private  gold  coins  are 
shown  in  the  frontispiece,  viz.  : 

1.  Coined  by  Templeton  Reid  of  Georgia.  Value  about  $5.00. 
Mr.  Reid  afterward  removed  his  coining  apparatus  to  California. 

2.  Bechtler  Mint  at  Rutherfordton,  N.  C.     Value  about  I4.90. 

3.  Letters  over  the  figure  of  a  beaver  are  the  initials  of  the  persons 
composing  the  Oregon  Exchange  Company.     Value  about  $4.84. 

4.  Letters  J.  S.  O.  mean  J,  S.  Ormsby,  the  coiner  of  these  pieces. 
Value  $g.27' 

5.  Mormon  coin.  Letters  above  the  clasped  hands  mean  Great 
Salt  Lake  City  Pure  Gold.     Value  $4.36. 

6.  Pike's  Peak  (Colorado)  coin.     Value  not  known. 

7.  Ingot  of  Moffat  &  Co.,  San  PVancisco.     Value  $16. 


COINAGE  23 

ranged  from  $4.36  to  $5.00.  The  people  who  took  them  in 
trade  could  not  distinguish  between  them  and  were  therefore 
liable  to  be  cheated.  The  government  did  not  forbid  the 
private  coining  of  gold  until  June  8,  1864. 

The  weight  of  a  new  gold  eagle,  or  double  eagle,  must  not 
vary  more  than  half  a  grain  from  the  standard  weight  fixed  in 
the  law.  That  of  the  smaller  gold  coins  must 
ofGow^"*  ^*"^^  ^^^  ^^^^  more  than  a  quarter  of  a  grain.  This 
allowable  variation  is  called  the  "  tolerance  of 
the  mint."  The  "mint  price"  of  gold  is  the  amount  of 
money  which  a  given  weight  of  standard  gold  will  produce 
when  coined.  An  ounce  of  gold  nine-tenths  fine  will  produce 
approximately  $18,604.  The  fine  ounce  is  worth  $20,671. 
As  the  gold  dollar  contains  23.22  grains,  the  $20  piece  con- 
tains 464.4  grains.  The  troy  ounce  contains  480  grains,  or 
15.6  grains  more  than  $20.  Then  23.22  :  100  : :  15.6  :  67.1 
approximately. 

The  mint  price  of  gold  in  England  is  jCs  ^7^-  lo^d.  per 
ounce.  This  is  the  exact  amount  of  money  which  an  ounce 
of  gold  of  the  English  standard,  |^  fine,  will  produce  by 
coinage.  Anybody  can  take  gold  to  the  British  mint  for 
coinage.  In  order  that  the  holders  of  gold  need  not  lose 
time  waiting  to  have  it  coined,  the  law  requires  the  Bank  of 
England  to  buy  all  the  gold  offered  to  it  at  the  price  of 
£^  ijs.  gd.  per  ounce.  The  difference  between  this  price 
and  the  mint  price  (i^^.)  is  compensation  to  the  Bank  for 
interest  and  for  the  labor  of  weighing,  assaying,  etc.  Coin- 
age in  the  United  States  is  free ;  that  is,  without  expense  to 
the  depositor  of  gold  bullion,  but  he  is  required  to  deposit 
also  the  alloy  used  in  making  the  coins,  or  to  pay  the  cost 
of  it. 

We  sometimes  hear  that  the  Bank  of  England  has  raised 
the  price  of  gold,  or  is  paying  a  premium  for  it.  This  means 
that  its  desire  to  obtain  gold  is  such  that  it  will  forego  a 


24  EVOLUTION   OF   MONEY 

part  of  the  i^d.  Strictly  speaking,  there  cannot  be  a  pre- 
mium   on    gold    in   a   country   which    has    the    single   gold 

standard,  since  that  would  imply  that  one  gold 
on  Gold  ''  sovereign   is  worth  more  than  another  of  the 

same  weight  and  fineness.     There  may  be  a 

premium,  however,  on  gold  bars  over  gold  coin,  or  on  one 

kind  of  coin   over   another   kind.     The   Bank  of   England 

sometimes  charges  a  little  more  for  American  eagles  than 

the  metallic  equivalent  in  pounds,  shillings,  and  pence,  and 

this  is  called  a  premium  on  American  gold.     This  is  not  a 

premium  on  gold  but  on  its  form. 

There  is  a  serious  loss  due  to  the  abrasion  of  gold  coin  in 

Ensfland.     Anybody  to  whom  it  is  offered  may 

Abrasion  of  Coin.  o  ^  ^  j 

weigh  it,  and  if  he  finds  it  below  the  legal  limit 

of  tolerance  the  law  requires  him  to  cut  it  in  half,  or  other- 
wise mutilate  it,  and  return  the  parts  to  the  person  tendering 
it.  Practically,  however,  nobody  does  this  except  the  Bank 
of  England  or  the  officers  of  the  government.  The  Bank 
weighs  all  coins  offered  to  it  and  complies  with  the  law  by 
mutilating  the  light  ones.  The  law,  as  it  stands,  throws  the 
whole  loss  of  abrasion  of  a  coin  on  the  last  holder.  This  is 
a  manifest  injustice.  The  same  rule  prevails  in  the  United 
States,  although  our  law  does  not  require  anybody  to  mutilate 
coins  of  li^ht  weight.  Anybody  may  refuse  to  receive  them. 
So,  practically,  the  loss  falls  upon  the  last  holder  here  as  in 
England.  The  evil  is  scarcely  felt  in  this  country  since  the 
circulation  of  gold  is  small  and  the  consequent-  abrasion 
slight. 

The  new  coinage  law  of  Japan  (1897)  provides  that  if,  in 
consequence  of  abrasion  from  circulation,  any  of  the  gold 
coins  fall  below  the  minimum  circulating  weight,  the  gov- 
ernment shall  exchange  such  coins  for  others  of  the  same 
face  value  without  making  any  charge.  It  proceeds  upon 
the  assumption  that  it  is  possible   to  distinguish  between 


COINAGE  25 

abrasion  caused  by  ordinary  wear  and  fraudulent  abrasion, 
or  "sweating."  It  is  the  opinion  of  some  of  the  officials 
of  the  United  States  Mint  that  this  is  feasible,  but  there 
has  not  been  sufficient  time  as  yet  to  decide  whether  the 
Japanese  experiment  is  a  safe  one.  In  1891  the  British 
Mint  was  authorized,  by  way  of  experiment,  to  exchange 
full-weight  gold  coins  for  light  ones  not  mutilated,  and 
an  appropriation  was  made  from  the  public  treasury  to 
pay  the  difference.  In  1897  the  practice  was  stopped, 
showing  that  the  results  of  the  experiment  did  not  justify 
its  continuance. 

Fraudulent  abrasion  and  clipping  of  coins  were  a  great 
pest  in   the  seventeenth  century.     The  silver  coins  circu- 
lating in  the  colonies  were  chiefly  Spanish 
DouS*^^^^^  dollars  —  sometimes  called  *'pieces-of-eight," 

being  of  the  value  of  eight  reals  —  and  their 
fractions.  They  were  brought  in  by  trade  with  the  West 
Indies.  Some  were  coined  in  Spain  and  others  in  the 
Spanish- American  colonies.  At  their  best  estate  they  were 
not  uniform  in  either  weight  or  fineness,  and  they  had  been 
.much  tampered  with  by  sweating  and  clipping.  The  heavier 
ones  were  constantly  culled  out  to  make  remittances  abroad, 
since  they  were  received  in  England  by  weight  only.  Those 
which  remained  in  the  colonies  grew  lighter  and  lighter, 
until,  in  1652,  the  pieces  in  circulation  had  lost  about 
one-fourth  of  their  original  weight. 

When  two  kinds  of  money,  differing  in  value,  are  equally 
current,  the  worse  drives  the  better  out  of  circulation.     The 

reason  is  that  brokers,  bullion  dealers,  jewel- 

Gresham's  Law.  ,       ,  ,    '   1     1  -^      n  ^  r^ 

ers,  and  others  who  habitually  make  a  profit 

from  the  use  and  handling  of  the  precious  metals,  select  the 

full-weight  coins  for  melting,  or  exportation,  and  pass  the 

light  ones  into  the  circulation.     The  same  rule  applies  in  a 

case  where  money  of  two  metals,  like  silver  and  gold,  is 


26  EVOLUTION    OF   MONEY 

coined  without  limit  at  the  mint,  and  both  kinds  are  equally 
legal  tender.  If  there  is  a  slight  difference  in  the  metallic 
value  of  the  different  kinds  of  dollars,  the  more  valuable 
ones  will  be  exported  by  bullion  dealers  and  the  less  valu- 
able retained  for  domestic  use.  This  is  called  Gresham's 
Law  from  Sir  Thomas  Gresham,  who  explained  it  to  Queen 
Elizabeth  about  the  year  1559. 

In  order  to  correct  the  defects  of  a  constantly  depreciat- 
ing currency  and  to   fix  a  standard  of  money,  the   colony 
of  Massachusetts,  in   1652,  decided  to  estab- 

c^i'oniai  Coins.  ^^^^  ^  "^^"^-  ^^^  ^^^  coinage  of  shillings,  six- 
penny, and  three-penny  pieces.  Conforming 
to  the  depreciation  that  already  existed,  she  gave  to  the 
shilling  the  weight  of  72  grains,  which  was  22^^  per  cent 
less  than  that  of  the  English  shilling.  The  English  standard 
of  fineness  was  preserved.  The  colony  did  not  itself 
operate  the  mint,  but  made  a  contract  with  one  John  Hull 
to  do  the  work,  requiring  him  to  receive  and  coin  all 
the  silver  offered  to  him  and  authorizing  him  to  retain 
as  his  pay  one  shilling  out  of  every  twenty  which  he  pro- 
duced. The  mint  was  closed  by  order  of  the  home 
government  in   1686. 

These  early  Massachusetts  coins  had  two  different  devices. 
The  first  issues  of  the  mint  were  plain  circular  discs  bearing 
on  one  face  the  letters  "  N  E  "  (New  England) 
ShmSg'"'^''^  and  on  the  other  face  "  XII  "  for  the  shillings, 
"VI  "  for  the  sixpences,  and  "  III  "  for  the 
three-penny  pieces.  These  pieces,  by  reason  of  their  plain- 
ness, offered  every  facility  to  coin  clippers,  by  whom  they 
were  speedily  reduced  in  size  and  weight.  In  order  to  pre- 
vent such  fraud  a  change  of  design  was  adopted  by  which 
the  figure  of  a  tree  was  stamped  on  one  face  and  a  row  of 
dots  and  lettering  was  placed  around  the  margin  of  the 
other.     This  became  known  as  the  "pine-tree  coinage." 


COINAGE  27 

The    disorders  of  the  currency  due  to  the  clipping  and 

sweating  of  coin  led  to  different  valuations  of  the  Spanish 

"  pieces-of-eight  "  at  different  places.     On  the 

The  Prociama-         g  j^  ^  .  1704,  a  proclamation  was  issued 

tion  of  Anne.  -'         >      /    t)       t- 

by  Queen  Anne  on  this  subject.     It  first  stated 

the  actual  value  of  foreign  coin  circulating  in  America,  in 
terms  of  sterling  money,  according  to  the  assays  of  the  mint. 
"  Sevil  pieces-of-eight  old  plate,^  17  pennyweight  12  grains," 
were  equal  to  4^".  6d.  The  proclamation  then  says  that 
"  from  and  after  the  first  day  of  January  next  no  Sevil,  pillar, 
or  Mexico  pieces-of-eight  shall  be  accounted,  received,  taken, 
or  paid  within  any  of  our  colonies  or  plantations  at  above  the 
rate  of  six  shillings  per  piece,  current  money,  for  the  dis- 
charge of  any  contracts  or  bargains  to  be  made  after  the 
said  first  day  of  January  next."  Six  shillings  was  consid- 
ered by  the  home  government  a  fair  average  of  the  various 
colonial  valuations  of  the  Spanish  dollar.  This  valuation 
came  to  be  known  everywhere  by  the  term  "  proclamation 
money"  or  "  proc.  money."  One  hundred  pounds  sterling 
was  the  equivalent  of  ^133 J  proclamation  money. 

The  proclamation  was  generally  disregarded,  because  it 

interfered  with  the  habits  of  the  people.     See- 
It  is  disregarded,    .  ,  ,  ,  .  ,     , 

mg  that  the  proclamation  was  not  regarded, 

Parliament,  in  1707,  embodied  it  in  a  law  and  decreed  a 
penalty  of  six  months'  imprisonment  and  a  fine  of  ;^io 
for  each  violation  of  it.  This  act  was  disregarded  as  com- 
pletely as  the  previous  proclamation  had  been.  Each  col- 
ony continued  to  keep  its  accounts  in  its  customary  pounds, 
shillings,  and  pence,  which  were  different  from  those  of 
England  and  which  differed  among  themselves.  Thus,  in 
New  York,  the  Spanish  dollar  was  rated  at  Ss.  and  in 
Pennsylvania  at  7^".  6d. 

1  The  word  "  plate  "  (Spanish  p/afa,  silver)  is  here  used  to  signify 
Spanish  silver  money,  not  bullion.     Old  plate  meant  old  coinage. 


28  EVOLUTION    OF   MONEY 

The  phrase  "money  of  account"  means  the  money  in 
which  people  keep  their  accounts  and  in  which  they  think. 

The  money  of  account  of  all  the  American 
Account  colonies  was  pounds,  shillings,  and  pence,  but 

there  were  no  such  things  in  circulation  except 
a  limited  amount  of  the  pine-tree  coinage.  The  money  in 
actual  use  was  the  Spanish  dollar  and  its  fractions,  more  or 
less  clipped  and  abraded.  The  division  of  the  dollar  into 
one  hundred  parts  was  not  made  till  1792.  By  a  law  of  that 
year  Congress  enacted  that  the  money  of  account  of  the 
United  States  should  be  dollars,  dimes,  etc.,  but  it  did  not 
become  so  in  practice  until  after  the  Civil  War.  Before 
that  era  the  price  of  merchandise  was  quoted  in  dollars, 
shillings,  and  sixpences. 


RECAPITULATION 

Coins  are  pieces  of  metal  stamped  to  indicate  their  weight, 
fineness,  and  the  rate  at  which  they  shall  pass  in  trade. 
Ours  are  of  two  kinds  :  (i)  full  legal  tender,  being  pieces 
of  gold  deposited  as  bullion  by  private  persons,  upon  which 
the  government  has  put  a  stamp  showing  its  weight  and  fine- 
ness ;  (2)  limited  legal  tender,  or  subsidiary,  being  small 
pieces  of  silver,  nickel,  or  copper,  made  by  the  government 
from  its  own  material,  and  sold  to  citizens  for  small  change. 

The  standard  unit  of  value  in  the  United  States  is  the  gold 
dollar,  but,  being  inconveniently  small,  it  is  not  now  coined. 

The  gold  coins  struck  at  the  mint  are  the  double  eagle 
(twenty  dollars)  and  its  submultiples  down  to  two  dollars 
and  a  half.  The  subsidiary  coins  are  the  silver  dollar  (one 
hundred  cents)  and  its  submultiples  down  to  one  cent.^ 

^The  exceptional  character  of  the  silver  dollar  will  be  considered 
more  fully  hereafter. 


COINAGE  29 

Seigniorage  is  the  profit  made  by  the  government  in  the 
manufacture  of  coins.  In  the  United  States  this  profit  arises 
from  silver,  nickel,  and  copper  coins  only. 

Coining  is  now  universally  considered  an  attribute  of  sov- 
ereignty. There  have  been  times,  however,  when  private 
coining  was  permitted,  and  such  was  the  case  in  the  United 
States  prior  to  1864. 

Gold  coins  when  abraded  more  than  one-half  of  one  per 
cent  are  legal  tender  only  in  proportion  to  their  weight. 

The  "  mint  price  of  gold  "  is  the  amount  of  money  that  a 
given  weight  of  gold,  say  one  ounce,  will  produce  when  coined 
in  accordance  with  law. 

When  two  kinds  of  money  differing  in  actual  value  are 
equally  current,  the  worse  drives  the  better  out  of  circulation, 
because  brokers,  bullion  dealers,  etc.,  select  the  better  for 
hoarding,  or  melting,  or  exportation.  This  principle  is  called 
"  Gresham's  Law." 

Authorities 

Linderman's  Money  and  Legal  Tender. 
Muhleman's  Mo7ietary  Systems  of  the  World. 
Watson's  History  of  American  Coinage. 
Snowden's  Coins  in  the  Cabinet  of  the  United  States  Mint. 
Jevons'  Money  and  the  Mechanism  of  Exchange. 
Falkner's  article  on  the  Private  Issue  of  Token  Coins,  in  the 
PQlitical  Science  Quarterly^  June,  1901. 


CHAPTER    III 
LEGAL  TENDER 

Anything  which  can  be  lawfully  used  in  payment  of  a 
debt  expressed  in  terms  of  money,  and  which  creditors  are 
required  to  accept,  is  called  legal-tender  currency,  or  simply 
legal  tender. 

The  principle  of  legal  tender  did  not  have  its  origin  in 
an  act  of  conscious  legislation.  The  government  begins,  at 
a  time  when  metal  is  circulating  by  weight,  to 
Tender  ^^^^'^  certify  the  weight  and  fineness.  It  stamps 
small  ingots  in  order  to  avoid  the  necessity 
of  frequent  weighing.  This  is  coinage.  Then  people  make 
contracts  in  terms  of  the  government  coinage,  and  the 
government  enforces  the  contracts.  Under  Roman  law  the 
creditor  was  obliged  to  take  in  payment  whatever  the  gov- 
ernment was  coining. 

The  origin  of  legal  tender  in  the  modern  world  is  con- 
nected with  the  reestablishment  of  the  double  standard  of 
gold  and  silver  in  Western  Europe  in  the  thirteenth  century, 
in  place  of  the  single  silver  standard  which  previously  pre- 
vailed. The  double  standard  means  that  debts  may  be 
paid  at  the  debtor's  option  with  either  one  of  two  metals 
coined  into  money  according  to  a  ratio  fixed 
^wSfTerr  by  public  authority -providing,  for  exam- 
pie,  that  one  pound  weight  of  gold  shall  be 
the  equivalent  in  law  of  fifteen  pounds  of  silver,  the  mints 
coining  both  metals  without  limit  for  private  persons.  The 
establishing   of   such    a   ratio    was   considered,    from    very 

30 


LEGAL  TENDER  3 1 

early  times,  an  attribute  of  sovereignty,  and  in  monarchical 
countries  a  prerogative  of  the  crown.  Each  proclamation 
of  the  ratio  was  virtually  a  legal-tender  act.  Debts  had  to 
be  paid  in  one  or  the  other  of  two  metals.  Consequently 
any  man,  or  body  of  men,  who  could  fix  the  ratio,  could 
decide  how  much  of  either  should  be  paid. 

From  the  analytical  point  of  view,  a  legal-tender  act  is 
nothing  but  an  act  of  legal  force,  establishing  a  new  defini- 
tion of  an  old  term — for  instance,  "dollar" — which  has 
been  customarily  used  in  making  contracts.  It  is  essen- 
tially ex  post  facto  legislation,  binding  the  courts  to  a  new 
interpretation  of  existing  contracts,  and  incidentally  inflict- 
ing various  degrees  of  injury  on  those  whose  position  is 
such  that  they  cannot  take  advantage  of  circumstances  to 
modify  existing  contracts  —  as  for  wages.  Extreme  cases 
may  be  imagined  where  such  action  might  be  needful  in  the 
interest  of  the  general  welfare,  but  with  very  few  exceptions 
the  passage  of  such  an  act  is  a  subterfuge  of  a  government 
for  giving  to  itself,  or  to  some  favored  class,  immediate 
advantage  over  part  of  the  community  concerned. 

Gold  and  silver  were  made  full  legal  tender  by  the  Con- 
gress of  the  United  States  at  the  ratio  of  i  to  15  in  1792. 
The  coinage  act  was  based  upon  a  report  of  Alexander 
Hamilton,  Secretary  of  the  Treasury.  Hamilton  examined 
the  question  of  the  standard  with  great  care,  and  although 
the  conclusion  he  reached  was  erroneous,  it  is  interesting  to 
observe  how  near  he  came  to  the  truth.  He  thought  that 
gold  was  better  fitted  to  be  the  standard  than  silver  because 
it  was  less  liable  to  fluctuations  of  value  and  also  because 
it  was  the  standard  de  facto.  He  observed  that  the  silver 
dollar  of  Spain  in  actual  circulation  had  no  standard  value 
by  weight  and  fineness,  but  circulated  by  tale,  "  very  much 
as  a  mere  money  of  convenience,"  whereas  gold  money  had 
a  fixed  weight  by  the  custom  of  merchants.     This  fixed 


32  EVOLUTION    OF   MONEY 

weight  was  24!  grains  of  fine  metal  per  dollar.^     While  this 

consideration    favored    the    adoption    of    the    single    gold 

standard,   Hamilton  says  that  "to  annul  the 

age  Iir  ^°'''"  "^^  °^  ^^^^^^  °^  ^^^^  ^^^^^^  ^^  money  [of  full 
legal  tender]  is  to  abridge  the  quantity  of  circu- 
lating medium,  and  is  liable  to  all  the  objections  which  arise 
from  a  comparison  of  the  benefits  of  a  full  with  the  evils  of 
a  scanty  circulation."  He  thought  also  that  a  country  could 
draw  to  itself  a  greater  quantity  of  the  precious  metals  in 
international  trade  by  means  of  the  double  than  of  the 
single  standard.  This  conception  was  erroneous,  but  it  was 
the  common  belief  of  the  time. 

Hamilton  accordingly  recommended  the  double  standard 
at  the  ratio  of  15  to  i.  He  had  not  failed  to  note  that  the 
Spanish  silver  dollars  in  circulation  were  of  two  different 
coinages,  varying  slightly  in  weight.  He  decided  to  take 
neither  of  them  as  the  exact  basis  of  our  coinage,  but  to 
take  instead  the  average  of  the  dollars  in  actual  circulation 
By  reason  of  abrasion  they  were  somewhat  lighter  than  the 

new  coins  then  issuing  from  the  Spanish 
Double  Legal  ^-  ^-^j^     ^^^^^     f^^^^    ^^^^^^    ^-^^    ^^^ 

Tender. 

having  regard    also    to    the    market    ratio  of 

the  two  metals  in  Europe,  he  decided  that  the  ratio  of  15  to  i 
would  be  not  far  from  the  true  metallic  equivalent.    Taking 

1  Hamilton  here  perceived  the  fact  that  a  standard  of  value  may 
exist,  and  have  controlling  force  in  mercantile  circles,  without  any  stat- 
ute law,  and  without  any  conscious  action  on  the  part  of  merchants 
themselves.  The  gold  standard  was  in  practical  operation  in  his  time, 
just  as  the  silver  standard  was  in  operation  in  the  colonies  when  tobacco 
and  other  forms  of  barter  currency  were  used.  The  mind  of  the  trader 
was  fixed  upon,  and  governed  by,  a  standard  different  from  the  one 
that  most  commonly  passed  from  hand  to  hand.  In  a  book  of  merit 
and  originality,  entitled  TAe  Evolution  of  Modern  Money  (Macmillan, 
1901),  Mr.  W.  W.  Carlile  has  traced  the  existence  of  what  we  may  call 
the  "latent  gold  standard"  in  Europe  for  a  long  period  before  gold 
became  the  avowed  standard. 


LEGAL  TENDER  33 

the  gold  valuation  of  the  dollar  (24!  grains  of  pure  metal) 
as  the  starting  point,  and  multiplying  by  15,  the  product, 
371:^  grains  of  pure  metal,  was  adopted  for  the  silver  dollar. 
The  smaller  coins  were  to  be  of  proportionate  weight  and 
full  legal  tender.  Congress  followed  these  recommendations 
in  the  coinage  act  of  1792. 

The  mint  began  to  coin  silver  in  1794  and  gold  in  1795. 
It  was  supposed  that  there  would  soon  be  a  plentiful  supply 
of  coins  of  both  metals ;  but,  in  order  to  provide  for  the 
interval  while  the  mint  was  in  course  of  erection  and  equip- 
ment. Congress  passed  a  law  making  certain  foreign  coins, 
of  both  gold  and  silver,  legal  tender  in  the  United  States 
according  to  their  weights  respectively.  This  act  was  to 
remain  in  force  three  years  after  the  starting  of  our  mint 
and  no  longer,  but  by  reason  of  the  difficulty  experienced 
in  retaining  our  own  coins  in  circulation  the  legal  tender  of 
foreign  coins  was  kept  in  force  by  repeated  reenactments 
for  more  than  sixty  years.  We  did  not  have  any  settled 
money  of  our  own  until  after  the  passage  of  the  act  of  1853 
providing  for  a  subsidiary  coinage. 

The  first  silver  dollars  turned  out  by  our  mint  were  a 
little  lighter  than  new  Spanish  dollars,  but  they  passed  in 
trade  for  the  same  value,  both  here  and  in  the  West  Indies. 
Brokers  began  to  collect  and  export  them  to  the  Spanish 
colonies,  where  they  were  exchanged  for  Spanish  dollars, 
and  the  latter  were  brought  back  for  recoinage  at  our  mint. 

There  was  a  profit  of  one  per  cent  in  the 
Its  Failure. 

operation.  As  coinage  was  free,  the  govern- 
ment was  working  for  bullion  brokers  without  pay,  and  was 
not  accomplishing  the  end  aimed  at.  It  was  not  supplying 
the  American  people  with  American  money.  Accordingly 
President  Jefferson,  in  1806,  gave  an -order  to  the  mint  to 
stop  the  coinage  of  silver  dollars  altogether.  This  order 
remained  in  force  thirty  years. 


34  EVOLUTION    OF   MONEY 

The  legal  ratio  of  15  to  i,  although  pretty  close  to  the 
market  ratio  at  the  time  when  the  coinage  act  of  1792 
was  passed,  did  not  long  remain  so.  In  1797  the  market 
ratio  in  Hamburg  was  15.47.  Gresham's  Law  asserted  itself. 
American  gold  coins  began  to  grow  scarce.  They  were 
melted  or  exported  because  they  were  worth  more  for  that 
purpose  than  for  debt-paying  at  home.  As  early  as  18 17 
they  had  entirely  disappeared  from  circulation,  although 
the  coinage  of  them  continued  at  the  usual  rate. 

In  1834  the  market  ratio  in  Hamburg  was  15.73  and 
gold  bore  a  premium  in  brokers'  offices  in  the  United 
States  of  4J  per  cent  over  silver.  Congress  had  had  the 
subject  of  a  change  of  the  legal  ratio  under  consideration 
since  18 18.  In  1834  it  passed  the  Gold  Bill,  —  so  called 
because  it  was  intended  to  bring  gold  again  into  circula- 
tion. The  ratio  adopted  was  approximately 
CohiaEe  Act  16  to  i.     The  amount  of  pure  metal  in   the 

•  silver  dollar  remained  unchanged.  That  of 
the  gold  dollar  was  reduced  from  24.75  grains  to  23.2 
grains,  but  was  increased  in  1837  to  23.22  grains,  at  which 
weight  of  pure  metal  it  now  stands.  This  made  the  gold 
dollar  2  per  cent  less  valuable  than  the  silver  one  at  that 
time.  It  was  a  debasement  of  the  currency  to  that  extent. 
There  was  strong  opposition  to  the  bill,  on  the  ground  that 
it  would  drive  our  silver  coins  out  of  circulation.  Neverthe- 
less, the  majority  in  favor  of  the  bill  was  very  large  in  both 
branches  of  Congress,  about  four  to  one  in  the  House  and 
five  to  one  in  the  Senate. 

When  the  law  of  1834  was  passed,  the  premium  on  gold 
in  the  market  was  4-^-  per  cent.  Anybody  having  $100 
gold  could  buy  $104.50  silver  to  pay  his  debts  with.  The 
government  had  never  promised  to  hold  the  market  ratio 
of  the  metals  steady  at  1:15.  This  had  come  in  the  course 
of   time    to   be    1:15.625.      Under   the    new   law  anybody 


LEGAL  TENDER  35 

having  $ioo  silver  could  buy  $102  gold  to  pay  his  debts 
with.  In  other  words,  the  standard  was  debased  2  per 
cent.  The  law  of  1834  ought  to  have  provided  that 
preexisting  contracts  should  be  settled  on  the  preexisting 
basis. 

There  were  no  silver  dollars  in  circulation,  since  the  coin- 
age of  them  had  been  discontinued  by  order  of  President 
Jefferson,  as  already  stated.     As  our  smaller 

Silver  Coins  in       silver    coins   were    of  full   weight,  they  were 

the  United  States 

prior  to  1853.  melted  and  exported,  and  their  place  in  the 

circulation  was  taken  by  light-weight  foreign 
coins,  principally  Spanish  and  Mexican.  Two  halves  or  four 
quarters,  if  new  and  full  weight,  were  worth  about  2  cents 
more  than  a  gold  dollar.  Consequently  they  were  collected 
by  brokers  and  exported.  But  two  halves,  or  four  quarters 
that  had  lost  2  cents'  worth  of  silver  by  abrasion,  would 
circulate,  because  there  would  be  no  motive  to  melt  or 
export  them.  From  1834  to  1856  the  silver  money  of  this 
country  consisted,  to  a  large  extent,  of  foreign  coins,  more 
or  less  worn,  chiefly  Spanish  and  Mexican,  but  with  a  con- 
siderable sprinkling  of  English,  French,  German,  and  Scan- 
dinavian pieces.  Every  merchant  kept  a  coin-chart  manual 
for  handy  reference  to  determine  the  value  of  these  pieces 
as  they  were  offered  in  trade. 

In  the  act  of  1853  we  adopted  the  principle  of  the  British 
act  of  1816.^  The  debates  in  Congress  on  this  bill  show 
that  it  was  the  fixed  intention  of  its  promoters  to  establish 
the  single  gold  standard,  and  that  there  was  scarcely  any 
opposition  to  the  project.  They  failed  to  carry  out  this 
intention,  however,  since  they  left  the  silver  dollar  in  the 
list  of  coins  to  be  struck  at  the  mint  if  anybody  should 
choose  to  deposit  silver  bullion  for  that  purpose.  Our 
silver  dollar  was  still  a  favorite  coin  in  China,  where  it 
1  See  page  63. 


-    3^  EVOLUTION   OF  MONEY 

passed  by  weight.  This  was  probably  the  reason  why  it 
was  not  treated   like   our  other  silver  coins   in  the  act  of 

1853.  The  silver  dollar  was  worth  four  cents 
Our  Third  Coin-  ^^^^  ^^^^  ^^^  j^  ^^jj^^.  ^^  ^^^  bullion  mar- 
age  Act.  o 

ket.      Consequently  none  were   to   be  found 

in  circulation,  although  upwards  of  $5,600,000  were  coined 
between  1853  and  1873.  All  of  these  must  have  gone  to 
China  except  a  few  which  were  retained  in  coin  collections 
and  as  curiosities.  The  act  of  1853,  however,  accomplished 
its  main  object.  It  gave  the  country  an  abundance  of  new 
and  bright  half  dollars,  quarters,  dimes,  and  half  dimes 
that  would  stay  at  home  and  serve  the  purpose  of  small 
change.  The  weight  of  the  half  dollar  was  reduced  about 
7  per  cent,  i.e.,  to  192  grains,  and  that  of  the  smaller 
coins  in  the  same  proportion.  Consequently  there  was 
no  longer  any  motive  to  export  them.  In  1857  the  legal- 
tender  faculty  was  taken  away  from  all  foreign  coins, 
both  gold  and  silver,  and  they  very  rapidly  passed  out 
of  circulation. 

In  1873,  when  the  next  change  took  place  in  our  coin- 
age system,  the  country  was  under  the  regime  of  irredeem- 
able paper.  Neither  gold  nor  silver  was  in  circulation. 
Practically  the  silver  dollar  had  never  been  in  circulation. 
To  Americans  it  was  an  unknown  coin.  From  1797  to 
1806  it  had  been  sent  out  of  the  country  by  speculators  to 
be  exchanged  for  Spanish  dollars.  From  1806  to  1836  the 
mint  had  ceased  to  coin  it  altogether.  After  1836  its  cir- 
culation was  rendered  impossible  by  reason  of  its  premium 
over  gold  in  the  bullion  market. 

In  1869  the  Treasury  Department  undertook  a  revision 
of  the  coinage  laws.  Mr.  Boutwell,  the  Secretary,  placed 
the  work  in  the  hands  of  Mr.  John  J.  Knox,  who  prepared 
a  bill  which  made  the  silver  coins  of  the  United  States  legal 
tender  for  only  $5.00  in  one  payment.     This  included  a 


LEGAL   TENDER  37 

silver    dollar   of   384   grains,  but  it  was  omitted  by  Con- 
gress and  the  "  trade  dollar,"  of  420  grains,  intended  for 
circulation  in  China,  was  substituted.    The  bill  provided  that 
no  silver  coins  except  those  enumerated  should 

Our  Fourth  Com-  ^^  struck  at  the  mint  and  that  none  except 
age  Act.  ^ 

trade  dollars    should    be    coined   for   private 

individuals.     The  silver  dollar  at  that  time  was  worth  about 

two  cents  more  than  the  gold  dollar.     The  bill  made  the 

gold  dollar  the  unit  of  value. 

Mr.  Knox's  report  and  the  accompanying  bill  were  sent 
by  the  Department  to  chambers  of  commerce  throughout 
the  country  and  to  persons  interested  in  monetary  science, 
in  order  to  get  their  opinions  and  advice.  They  were  sent 
to  Congress  in  April,  1870.  The  bill  passed  the  Senate 
on  the  loth  of  January,  187 1,  but  was  not  reached  by  the 
House  in  time  for  passage  by  that  Congress.  It  came  up 
in  the  next  Congress,  and  after  debate  in  the  House,  in 
which  the  policy  of  discontinuing  the  silver  dollar  was 
specially  discussed,  it  passed  that  body,  May  27,  1872,  by 
a  vote  of  no  to  13.  It  passed  the  Senate  January  17, 
without  a  division,  and  became  a  law  February  12,  1873. 
The  United  States  thus  adopted  the  single  gold  standard. 

Private  persons  were  allowed  to  deposit  silver  bullion 
at  the  mint  and  have  it  coined  into  trade  dollars  for  their 
own  account.  It  was  never  intended  that  the  trade  dollar 
should  circulate  in  the  United  States  at  all,  but  it  was  inad- 
vertently placed  in  the  list  of  coins  which  were  legal  ten- 
der for  $5.00.  As  soon  as  the  price  of  silver  fell  so  that 
420  grains  were  worth  less  than  a  dollar,  it 
Douar^^^^  became  profitable  for  owners  of  silver  to  have 

these  dollars  coined  and  put  in  circulation  at 
home.  Straightway  they  began  to  fill  the  channels  of  retail 
trade.  They  became  so  great  a  nuisance  that  Congress,  in 
1876,  took  away  their  legal- tender  quality  altogether.     This 


38  EVOLUTION    OF   MONEY 

led  to  a  dispute,  with  a  charge  of  bad  faith.  So  Congress, 
in  1878,  discontinued  the  coinage  of  trade  dollars  entirely. 
This  only  aggravated  the  dispute.  Speculators  bought  up 
the  trade  dollars  with  the  expectation  that  the  government 
would  eventually  redeem  them  at  par.  Nearly  $2,000,000 
of  them  were  reimported  from  China  for  that  purpose. 
Finally,  in  1887,  Congress  passed  a  bill  to  redeem  at  par 
all  that  should  be  presented  within  six  months,  and  Pres- 
ident Cleveland  allowed  it  to  become  a  law  without  his 
signature.  The  number  of  trade  dollars  so  redeemed  was 
7,689,036.1 

The  following  varieties  of  legal  tender  exist  at  the  present 
time  under  the  laws  of  the  United  States  : 

1.  Gold  coins,  legal  tender  without  any 
~:T:S:f  express  limit. 

2.  Silver  dollars,  and  Treasury  notes  issued 
under  the  act  of  1890,  legal  tender  "except  where  otherwise 
expressly  stipulated  in  the  contract." 

3.  United  States  notes  (greenbacks),  legal  tender  except 
for  interest  on  the  public  debt  and  for  duties  on  imports. 
Since  the  resumption  of  specie  payments  (1879)  these  notes 
have  been  made  receivable  for  duties  by  Treasury  order,  to 
avoid  the  trouble  of  carrying  gold  to  and  from  the  custom 
house. 

4.  National  bank  notes,  legal  tender  in  payment  of  any 
debt  or  liability  to  any  national  bank  ;  also  receivable  for 
all  government  dues  except  duties  on  imports. 

5.  Silver  coins  smaller  than  $1.00,  legal  tender  to  the 
amount  of  $10  in  one  payment.  Coins  of  nickel  and  copper, 
legal  tender  to  the  amount  of  25  cents  in  one  payment. 

1  A  detailed  account  of  the  struggles  of  the  government  with  the 
trade  dollar  is  given  in  Upton's  Money  in  Politics. 


LEGAL   TENDER  39 

RECAPITULATION 

Legal  tender  may  consist  of  anything  which  the  law 
of  a  country  declares  shall  be  received  in  discharge  of  an 
obligation  which  is  payable  in  money. 

There  are  several  different  kinds  of  legal  tender  in  the 
United  States.  That  of  gold  coin  is  the  only  one  which  is 
not  subject  to  any  limitations. 

If  a  law  of  tender  is  made  applicable  to  debts  contracted 
or  to  bargains  made  before  its  enactment,  and  it  alters  the 
terms  thereof,  it  is  unjust.  It  is  sometimes  said  that  a 
change  in  the  law  of  tender  exhausts  itself  on  past  debts  ; 
that  while  people  cannot  avoid  accepting  the  new  legal- 
tender  thing  for  preexisting  dues,  yet  that  they  straightway 
adjust  their  business  and  bargains  to  the  new  law,  and  thus 
escape  further  harm.  This  is  true  of  only  a  very  small  part 
of  the  community.  The  masses  either  do  not  understand 
the  subject  sufficiently,  or  are  so  entangled  in  the  social 
fabric  that  they  cannot  protect  themselves.  For  example, 
no  individual  workman  can  raise  his  wages  by  his  own 
volition  merely  because  his  cost  of  living  has  increased. 

A  law  of  tender  adds  nothing  to  the  value  of  gold  coins. 
The  private  gold  coins  that  circulated  in  the  United  States 
between  1830  and  i860  were  not  legal  tender,  yet  they  were 
of  equal  value  with  government  coins  when  they  contained 
the  same  amount  of  gold.  Gold  bars  are  not  legal  tender, 
yet  they  occasionally  command  a  small  premium  over  coin 
by  reason  of  their  convenience  in  international  trade. 

The  first  coinage  act  of  the  United  States  (1792)  made 
all  of  our  gold  and  silver  coins  full  legal  tender  at  the 
weight  ratio  of  i  to  15.  Under  this  act  gold  gradually 
disappeared  from  the  circulation,  one  ounce  of  it  being  worth 
more  in  the  bullion  market  than  fifteen  ounces  of  silver. 

The  second  general  coinage  act  (1834)  made  both  gold 


40  EVOLUTION   OF   MONEY 

and  silver  coins  full  legal  tender  at  the  weight  ratio  of  i  to 
1 6.  Under  this  act  silver  was  expelled  from  the  circulation, 
sixteen  ounces  of  it  being  worth  more  in  the  bullion  market 
than  one  ounce  of  gold.  In  this  act  the  legal  tender  was 
debased  about  2  per  cent  by  diminishing  the  weight  of  the 
gold  coins. 

The  third  general  coinage  act  (1853)  lessened  by  7  per 
cent  the  amount  of  fine  metal  in  the  silver  coins  smaller 
than  $1.00,  in  order  to  prevent  their  exportation.  It  limited 
the  legal-tender  faculty  of  these  silver  coins  to  $5.00  in  one 
payment.  It  did  not  change  the  legal- tender  act  of  1834 
in  any  other  particular.  The  half  dollar  weighs  12^  grams 
(French  metric  system).  Two  of  them  are  exactly  the 
weight  of  the  five-franc  piece.  The  quarter  dollar  weighs 
one-half  and  the  dime  one-fifth  as  much  as  the  half  dollar. 

The  fourth  general  coinage  act  (1873)  omitted  the  silver 
dollar  from  the  list  of  coins  authorized  to  be  struck  at  the 
mint  and  made  the  gold  dollar  the  unit  of  value.  At  that 
time  the  silver  dollar  was  worth  more  than  the  gold  dollar. 
The  act  of  1873  put  the  United  States  on  the  basis  of  the 
single  gold  standard. 

Legal-tender  notes  will  be  considered  in  a  subsequent 
chapter. 

Authorities 

In  addition  to  those  of  the  preceding  chapter: 
Hamilton's  Report  on  the  Mint. 

Laugh lin's  History  of  Bimetallism  in  the  United  States. 
Brough's  Natural  Law  of  Money. 
F.  A.  Walker's  Money. 
Upton's  Money  in  Politics. 

History  of  the  Coinage  Act  of  1873,  published  by  the  House 
of  Representatives,  1900. 


CHAPTER    IV 
GOLD  AS   A  METAL 

The  metal  gold  occupies  a  unique  place  among  the  sub- 
stances of  which  the  earth  is  composed.  It  is  accepted  by 
civilized  mankind  without  compulsion  and  without  limit  in 
exchange  for  all  other  kinds  of  property  and  for  all  the  serv- 
ices that  men  render  to  each  other  for  hire.  For  this  rea- 
son it  is  an  object  of  universal  desire.  As  a  mineral  it  is 
sought  for  with  greater  eagerness  than  any  other  substance 
in  or  upon  the  earth. 

Gold  is  yellow  in  color  in  the  natural  state,  and  is  the 
only  metal  that  is  so.  Its  atomic  weight  is  196.7,  that  of 
hydrogen  being  reckoned  as  i.  Its  specific  gravity  is  19-3, 
being  exceeded  only  by  that  of  platinum,  iridium,  and 
osmium.  Its  melting  point  is  2014°  F.,  at  which  temper- 
ature there  is  no  perceptible  loss  by  volatilization,  even 
when  long  continued  and  often  repeated.  It  is  the  most 
ductile  of  the  metals.  It  can  be  beaten  into  sheets  g^ooV^^ 
of  an  inch  in  thickness.  A  single  grain  can  be  drawn  into 
a  thread  500  feet  long.  As  a  conductor  of  electricity  it  is 
inferior  only  to  silver  and  copper. 

Gold  is  found  in  placers  in  the  beds  of  existing  rivers  or 

in   those   of    past  geological   ages,  which    are   now   dry  or 

uplifted,  or  buried  under  new  strata.    It  is  also 

Where  Gold  found  in  veins  of  rock  formation.     It  has  been 

IS  lound. 

found  in  the  United  States  in  rocks  of  all 
geological  ages  from  the  pre-Silurian  to  the  Quaternary.  It 
was  the  opinion  of  Professor  Newberry  that  the  metal  in 

41 


42  EVOLUTION    OF    MONEY 

fissure  veins  was  deposited  there  from  chemical  solutions 
forced  upward  from  deeply  buried  rocks  of  various  kinds, 
from  which  the  gold  had  been  leached  under  great  pres- 
sure and  heat.  Gold  is  found  also  in  bedded  veins  of 
sedimentary  rock  in  conjunction  with  argentiferous  galena, 
iron  pyrites,  and  other  metals,  where  there  is  no  trace  of  a 
fissure.  It  has  been  found  in  common  clay,  and  also  traces 
of  it  in  sea  water.  Placer  gold  has  been  separated  from 
vein  formations  and  conveyed  by  running  water,  in  con- 
junction with  gravel  and  other  detritus,  to  the  places  where 
it  is  found. 

Gold  does  not  suffer  any  change  by  exposure  to  the  air 
or  by  being  buried  in  the  earth.  It  is  rapidly  dissolved  in 
quicksilver  at  ordinary  temperatures,  and  forms  with  it  an 
amalgam,  either  fluid,  or  pasty,  or  solid,  according  to  the 
proportions  of  each  metal  present.  The  quicksilver  can  be 
distilled  from  the  mass  by  heat  and  recovered 

Its  Affinity  for  .  condensation,  leaving  the  gold  solid.  It 
Quicksilver.  •'  »  &  &  ^ 

thus  becomes  an  agent  of  supreme  impor- 
tance in  the  production  of  gold.  Its  use  was  known  to  the 
ancients.  Pliny  says  with  truth  that  if  gold  mixed  with 
impurities  is  shaken  in  a  vessel  containing  quicksilver,  the 
latter  will  absorb  the  gold  and  reject  the  impurities,  and 
that  the  quicksilver  can  then  be  squeezed  through  a  skin 
like  perspiration,  leaving  the  gold  pure.  Quicksilver  has 
the  same  affinity  for  silver  as  for  gold. 

Placer  gold  is  of  various  sizes,  ranging  from  dust  up  to 
nuggets  weighing  many  pounds,  and  of  various  degrees  of 

purity.  That  of  Australia  averages  950  in 
Placer  Gold.  ,     .  .  1  j        • 

1000,  being  purer  than  any  gold  coin  now  in 

use ;  that  of  California  averages  884 ;  that  of  Montana 
895.  Native  gold  is  almost  always  associated  with  silver. 
In  1000  parts  of  placer  gold  of  California,  112  are  com- 
posed of  silver,  and  4  of  base  metal. 


GOLD   AS    A    METAL  43 

The  most  common  method  of  obtaining  alluvial  or  placer 
gold  is  by  washing  river  sands.  "  Panning  "  was  practiced 
by  the  Egyptians  in  prehistoric  times.  This  process  con- 
sists of  stirring  with  the  hands  a  quantity  of  gold-bearing 
sand  in  a  hollow  vessel  filled  with  water.  The  gold,  being 
heavier  than  the  other  material,  sinks  to  the  bottom.  The 
earthy  matter  is  spilled  over  the  top  of  the  vessel  from  time 
to  time  as  the  stirring  proceeds.  When  the  panful  has 
been  thoroughly  washed  most  of  the  gold  contained  in  the 
mass  will  be  found  in  the  bottom  of  the  pan.  As  there  is 
always  some  sand  and  gravel  left,  it  is  customary  to  collect 
the  gold  by  means  of  quicksilver. 

Sluicing  is  the  method  by  which  auriferous  sands  and 
gravels  are  now  attacked  in  places  where  water  can  be 
obtained  in  sufficient  quantity.  In  the  ancient  world  water 
from  gold-bearing  mountains  was  made  to  flow  over  hides, 
or  sheepskins,  in  which  the  particles  became  entangled. 
Thence,  probably,  came  the  legend  of  the  golden  fleece. 

Sluicing  is  performed  by  shoveling  gold-bearing  earth 
into  running  water,  which  is  made  to  pass  through  a  wooden 
conduit,  on  the  bottom  of  which  are  fastened  a  series  of 
"  riffles,"  or  obstructions,  against  which  the  heavier  portion 
of  the  material  lodges.  Quicksilver  is  fed  into  the  stream 
at  various  places  in  the  form  of  a  fine  rain, 
CoUection*  being  squeezed   through   chamois   leather  or 

canvas  to  give  it  dispersion.  It  passes  down 
the  inclined  surface  and  lodges  with  the  other  heavy  material 
against  the  riffles,  where  it  collects  the  gold  by  amalgama- 
tion. When  the  first  riffle  is  full,  the  material  suspended  in 
the  water  passes  over  the  obstruction  and  is  caught  in  the 
next  one,  and  so  on  till  all  are  filled.  Then  the  "  clean-up  " 
begins.    The  gold  is  found  amalgamated  with  the  quicksilver. 

Hydraulic  mining  is  sluicing  on  a  large  scale,  in  which 
the  force  of  a  jet  of  water  is  used,  instead  of  shoveling,  to 


44  EVOLUTION    OF   MONEY 

break  down  the  bank  and  move  the  earth  and  gravel  to  the 
entrance  of  the  sluice.  For  this  purpose  a  powerful  head 
of  water  is  required,  from  one  hundred  to  three  hundred 
feet  higher  than  the  ground  to  be  operated  on.  The  water 
is  collected  in  mountains,  sometimes  at  long  distances  from 
the  works,  and  brought  in  ditches  which  follow  the  contour 
of  the  country,  often  crossing  valleys  on  high  trestlework 
or  by  inverted  siphons.  Sometimes  the  "  pay  gravel  "  is 
found  where  there  is  insufficient  drainage,  and  it  becomes 
necessary  to  excavate  tunnels  to  carry  off  the  "tailings." 
One  such  tunnel  in  California  is  7874  feet 
Hydraulic  j  rpj^  •     delivered   against   the 

Mining.  =>  ° 

bank  through  an  iron  nozzle  with  something 

like  the  velocity  of  a  cannon  ball.  It  soon  excavates  a 
hole,  which  is  gradually  enlarged  until  the  superincumbent 
mass  falls  down.  Then  this  is  attacked  by  the  same 
means,  and  the  v;hole  mass  begins  to  dissolve  and  follow 
the  drainage  line,  which  brings  it  to  the  sluices  con- 
structed like  those  already  described,  but  on  a  much 
larger  scale.  They  are  operated  on  the  same  principles 
as  the  smaller  ones. 

The  disposition  of  the  tailings  has  been  the  most  serious 
problem  of  hydraulic  mining  in  California.  Not  only  is  the 
natural  drainage  of  the  country  altered  by  these  operations, 
but  stupendous  quantities  of  earth  are  carried  down  and 
deposited  in  the  beds  of  the  rivers,  which  are  caused  to 
overflow  their  banks  and  spread  the  detritus  over  the 
adjoining  lands,  to  the  ruin  of  agriculture.  A  vast  deal  of 
litigation  has  ensued,  and  the  state  legislature  has  been 
compelled  to  intervene  for  the  protection  of  the  farmers. 
Hydraulic  mining  is  the  most  economical  of  all  methods  of 
obtaining  gold,  the  cost  being  from  ij  cents  to  8  cents  per 
ton  of  material  treated.  The  most  expensive  is  panning, 
the  cost  of  which  is  $5.00  to  ^8.00  per  ton. 


GOLD  AS   A   METAL  45 

Gold  existing  in  rock  formation  is  either  free-milling  or 
combined  chemically  with  other  substances.  Often  both 
are  found  in  the  same  mine.  Free-milling  ores  are  treated 
by  crushing  and  then  amalgamating  with  quicksilver.  In 
reaching  the  metal  and  tearing  it  from  the  rock,  man 
accomplishes  with  his  own  hands  what  nature  has  done 
for  him  in  the  case  of  placer  gold. 

There   are  numerous   methods   of   crushing   free-milling 

ores,  the  one  most   largely  used  being  that  of  the  stamp 

battery.     The  ore  is  first  reduced  to  the  size 

Quartz  Crushing.       .  ^  ^  ^         ^  -r     •        -, 

of  a  walnut  by  a  stone-breaker.     It  is   then 

put  into  an  elongated  mortar  made  of  cast-iron,  which  has  a 
series  of  iron  pestles  arranged  side  by  side,  so  as  to  be 
lifted,  one  by  one,  by  a  revolving  wheel  and  allowed  to  fall. 
Water  is  supplied  to  keep  the  mass  in  a  splashing  state, 
and  also  quicksilver  to  amalgamate  the  gold  as  it  is  released 
from  the  pulverized  rock.  Sometimes  the  sides  of  the 
mortar  are  lined  with  copper  plates,  which  have  been 
previously  amalgamated  with  quicksilver,  as  the  amalgam 
produced  in  the  mortar  tends  to  adhere  to  the  surface  of 
such  plates.  The  contents  of  the  mortar  are  thus  reduced 
to  a  "pulp,"  which  is  allowed  to  flow  slowly  over  a  series 
of  amalgamated  copper  plates,  by  which  still  more  of  the 
gold  is  amalgamated  and  retained,  the  remainder  passing 
off  as  tailings.  The  tailings  contain  some  gold,  and  are 
subjected  to  further  treatment.  The  excess  of  quicksilver 
in  the  amalgam  is  recovered  by  squeezing  it  through  filter- 
bags  of  chamois  leather  or  buckskin,  which  leaves  a  solid 
amalgam.  The  remainder  is  evaporated  by  heat  and  the 
vapor  condensed  by  passing  through  pipes  which  are  sub- 
merged in  cold  water.     The  solidified  gold  remains. 

There  are  two  important  chemical  processes  for  the 
extraction  of  gold  from  sulphides  and  other  refractory  ores  : 
one  by  chlorine,  the  other  by  cyanide  of  potassium.     By 


46  EVOLUTION    OF   MONEY 

the  former  the  ore  is  first  reduced  to  sizes  small  enough  to 

expose  all  the  gold  contained  in  it  to  contact  with  chlorine 

gas.     It    is   then    roasted,   either   in    a  reverberatory   or    a 

revolving  furnace,  in  order  to  expel  sulphur, 

Chlorination.  .     ^  '  i"  i^        ? 

arsenic,    and    other    impurities    which    would 

impede  the  action  of  the  chlorine.  The  charge  is  then 
drawn  from  the  furnace  and  allowed  to  cool,  after  which  it 
is  shoveled  into  a  vat  and  impregnated  with  chlorine  gas. 
Then  it  is  leached  with  water  as  wood-ashes  are  leached  for 
making  lye.  The  resulting  liquor  contains  chloride  of  gold, 
which  is  usually  precipitated  by  adding  to  it  a  solution  of 
sulphate  of  iron,  the  gold  falling  to  the  bottom  in  the  form 
of  a  powder,  and  usually  in  a  very  pure  state,  sometimes  as 
high  as  990.  Precipitation  can  be  effected  also  by  passing 
the  solution  over  charcoal,  to  which  the  gold  adheres,  the 
charcoal  being  afterwards  burned  and  the  gold  recovered. 

The  cyanide  process-  is  of  comparatively  recent  date.  It 
has  been  in  operation  in  the  United  States  about  twenty 
years  ;  in  South  Africa  a  little  longer.  A  solution  of 
cyanide  of  potassium  will  dissolve  metallic  gold.  This 
affinity  is  now  the  basis  of  great  industries  and  has  enabled 
mankind  to  save  large  quantities  of  the  precious  metal  that 
would  otherwise  have  been  lost.  The  process  is  substan- 
tially like  that  of  chlorination,  except  that  roasting  is  not 
generally  required.  The  ore  is  first  comminuted,  as  in 
chlorination,  and  placed  in  large  vats,  where  it  is  leached 
by  a  dilute  solution  of  cyanide,  the  liquor  being  allowed  to 
remain  until  all  the  gold  has  been  extracted.  It  is  then 
drawn  off  by  a  stopcock  into  a  box  under 
The  Cyanide         ^^^    ^^^^      rj,^^  ^^^^   j^   precipitated  by   zinc 

shavings,  and  falls  to  the  bottom  of  the  box 
in  the  form  of  a  slime.  Another  method  of  precipitating 
the  gold  is  by  electrolysis.  A  current  of  electricity  is 
passed  through  the  solution,  and  the  gold  is  precipitated  on 


GOLD   AS    A    METAL  47 

thin  sheets  of  lead  suspended  in  it  and  to  which  it  adheres. 
These  are  melted  in  order  to  recover  the  gold.  More 
recently  sheets  of  aluminum  have  been  used  instead  of 
lead,  as  the  gold  can  be  removed  without  injury  to  the 
sheets.  The  cyanide  process  has  added  largely  to  the 
productiveness  of  the  gold  fields  of  South  Africa,  and  has 
made  the  accumulated  tailings  of  past  years  a  source  of 
profit.  It  has  made  many  mines  profitable  that  could  not 
be  worked  before. 

There  are  also^  many  methods  of  extracting  gold  from 
metals  associated  with  it,  by  smelting. 

It  was  the  opinion  of  Professor  Newberry  twenty  years 
ago  that  nine-tenths  of  all  the  gold  in  the  possession  of 
mankind  had  been  obtained  from  placer  deposits.  At  the 
present,  time  the  greater  part  of  the  annual  increment  is 
obtained  from  veins  in  rock  formation. 


RECAPITULATION 

The  metal  gold  is  the  common  medium  of  exchange  and 
measure  of  value  among  civilized  peoples.  It  was  used  for 
purposes  of  ornament  in  the  ancient  world  before  it  was 
used  as  money. 

It  is  found  in  detached  fragments  and  particles  in  the 
beds  of  existing  rivers  and  also  of  ancient  ones  now  dry. 
In  this  situation  it  is  called  placer  gold.  The  greater  part 
of  the  metal  now  in  the  possession  of  mankind  is  placer 
gold.  The  most  important  agent  for  the  recovery  of  placer 
gold  is  quicksilver,  which  dissolves  it  and  forms  an  amalgam 
with  it,  the  earthy  matter  being  rejected.  The  quicksilver 
can  be  easily  separated  from  the  amalgam  and  used 
again.  Placer  gold  has  been  detached  from  rock  forma- 
tions and  conveyed  by  running  water  to  the  places  where 
it  is  found. 


48  EVOLUTION    OF   MONEY 

Gold  exists  in  rock  formations  in  a  comparatively  pure 
state,  and  also  in  chemical  combination  with  other  sub- 
stances. It  has  been  found  in  the  United  States  in  rocks 
of  all  geological  ages. 

Placer  gold  is  easily  separated  from  the  earthy  matter 
associated  with  it  by  means  of  water  and  quicksilver. 

Gold  in  rock  formation  is  obtained  by  crushing  the  rock 
and  either  amalgamating  with  quicksilver,  or  treating  it  by 
chlorination  or  cyanide  of  potassium,  or  by  smelting. 


CHAPTER   V 
GOLD  PRODUCTION 

According  to  the  statistics  of  the  Director  of  the  Mint, 
the  world's  production  of  gold  for  the  first  half  of  the  nine- 
teenth century  was  $787,463,000,  and  for  the  second  half 
$6,914,679,100. 

The  chief  gold-producing  countries  at  the  beginning  of 

the    century    were    Mexico,    Colombia,    Brazil,    Peru,    and 

Buenos  Ayres  in  the  western  hemisphere,  and  Russia  and 

Hungary  in  the  eastern.     Small  quantities  were  obtained 

also  from  the  East  Indies  and  from  Africa.     From  1801  to 

18 10  the  average  annual  yield  from  all  countries  was  about 

$12,000,000,  two-thirds  of  which  came  from  American  mines. 

Revolutionary  disturbances  in  Mexico  and  South  America, 

which  broke  out  in   18 10  and  continued  till 

First  Half  of         1824,  caused  a  great  reduction  of  their  out- 

the  Nineteenth  \.    ,       ,  7,  ,       .,  rx.. 

Century.  put   of  both   gold  and   silver.     The  world  s 

production  of  gold  declined  to  an  average  of 

$7,600,000  per  year,  which  was  not  sufficient,  in  the  opinion 

of  Mr.  William  Jacob,  a  leading  authority  for  that  period, 

to    supply  the   amount  used  in  the  arts  and   make  good 

the  loss  by  abrasion,  shipwreck,  and  other  accident.     After 

the  restoration   of  peace  in  those  countries   there  was    a 

gradual  gain  in  their  production  of  gold.     That  of  Russia 

increased  also,  her  average  output  from  1837  to  1848  being 

$12,500,000  per  year,  or  more  than  that  of  the  whole  world 

at  the  beginning  of  the  century.     The  details  of  production 

49 


50  EVOLUTION    OF   MONEY 

for  the  first  half  of  the  century,  as  computed  by  the  Director 
of  the  Mint,  are  the  following : 

Annual  Total  for 

Period  Average  Period 

1801-1810 J^I  1,815,000  $118,152,000 

1811-1820 .  7,606,000  76,063,000 

1821-1830 9,448,000  94,479,000 

1831-1840 13,484,000  134,841,000 

1841-1850 36,393,000  .363,928,000 

Half  century       ....     $15,749,200  $787,463,000 

On  the  19th  of  January,  1848,  James  Wilson  Marshall 
found  a  small  lump  of  gold  in  the  tail-race  of  Sutter's  saw- 
mill in  El  Dorado  County,  California.  This  discovery  led 
to  a  search  in  the  bed  of  the  stream  and  in  the  adjoining 
ground,  which  w^as  found  to  contain  rich  deposits  of  the 
precious  metal.  The  news  spread  like  wildfire  through- 
out California  and  the  Pacific  coast  of  North  and  South 
America,  and  later  to  the  Atlantic  States,  and  all  civilized 
countries,  leading  to  a  great  immigration  of 
California  and       goM-hunters.     The  production   of   the  metal 

Australia.  °  ^  ^ 

in  California  alone  in   1850  was  $36,000,000, 

being  equal  to  the  annual  average  of  the  whole  world  during 
the  preceding  decade.  It  reached  $56,000,000  in  185 1. 
In  the  latter  year  a  similar  discovery  of  placer  gold  was 
made  in  New  South  Wales,  Australia,  followed  by  a  still 
more  important  one  in  the  colony  of  Victoria.  These  dis- 
coveries were  also  attended  by  public  excitement  and  heavy 
immigration.  The  production  of  gold  in  Australia  and 
New  Zealand  rose  to  $65,000,000  in  1854.  Concurrently 
with  these  discoveries,  there  was  a  considerable  increase 
of  production  in  Russia,  which  reached  $25,000,000  per 
annum. 

The  next  great  discovery  of  the  precious  metals  was  that 
of  the  Comstock  lode  in  Nevada.     This  is  a  fissure  vein 


GOLD   PRODUCTION  5  I 

four  miles  long  in  rock  of  the  Tertiary  age.  It  is  situated 
at  the  base  of  Mount  Davidson  in  the  Virginia  range,  an 
offshoot  of  the  Sierra  Nevada.  In  the  central  part  of  the 
fissure  its  width  is  about  3000  feet.  The  gangue,  or  vein- 
stone, is  quartz,  not  uniformly  distributed  in 
Lode^°™^*°*^^  the  fissure,  but  coagulated  in  large  bodies 
called  "  bonanzas."  The  magnitude  of  this 
deposit  may  be  inferred  from  the  fact  that,  since  186 1, 
when  it  was  first  worked  scientifically,  it  has  yielded 
$350,000,000  of  bullion,  and  that  190  miles  of  shafts  and 
galleries  have  been  excavated  in  it.  Forty  per  cent  of 
the  bullion  produced  was  gold  and  60  per  cent  silver. 
In  1882  the  richest  ore  bodies  of  the  Comstock  lode 
had  been  exhausted,  and  the  annual  yield  had  fallen  to 
$1,333,000,  from  which  point,  however,  there  was  a  recovery 
to  $7,000,000  in  1887,  due  to  the  working  of  low-grade 
ores  that  had  been  previously  neglected. 

In  the  meantime  (in  1884)  a  discovery  had  been  made  in 
South  Africa  that  was  destined  to  surpass  in  magnitude  the 

Comstock   and   every   other   deposit   of    the 
South  Africa.  ,       ,         \  ,  ,  ,      , 

precious  metals  that  the  world  had  ever  seen. 

This  was  in  the  Witwatersrand  of  the  Transvaal.  Here  the 
country  rock  is  a  bed  of  sandstone,  interlaminated  with 
deposits  of  conglomerate,  which  the  Dutch  call  "banket." 
This  conglomerate  carries  the  gold,  the  average  being  ten 
pennyweights  per  ton  of  material.  Borings  to  the  depth  of 
3500  feet  have  found  the  gold-bearing  reef  undiminished. 
The  outcroppings  of  the  reef  have  been  traced  for  a  dis- 
tance of  forty  miles.  The  production  of  the  Transvaal  in 
1898  was  $78,070,761.  There  was  an  interruption  of  the 
working  of  the  Rand  mines  in  the  latter  part  of  1899  and  in 
1900  by  reason  of  the  war  with  Great  Britain.  In  the  latter 
year  the  production  fell  to  less  than  $10,000,000,  but  after 
the  war  it  rose,  in  1903,  to  $59,000,000,  notwithstanding  a 


52  EVOLUTION   OF   MONEY 

great  scarcity  of  labor  in  South  Africa.     There  are  other 

deposits  of  gold  in  the  Transvaal  and  in  Rhodesia,  which 

may  prove  to  be  important. 

One  of  the  most  surprising  discoveries  of  modern  times 

is  that  of  the  gold  placers  of  the  Klondike  in  the  Yukon 

territory  of  Canada.    These  are  deposits  underneath  ground 

„^   „,  which  is  perpetually  frozen.     The  method  of 

The  Klondike.  ... 

obtammg    the    gold    is    by    sinking    a    shaft 

through  the  frozen  ground  by  means  of  hot  bowlders.    Then 

a  drift  is  run  by  building  a   fire   against  the  face   of  the 

ground.     The  gravel  is  thrown  out   and   left  till    summer, 

when  it  thaws  and  is  washed  by  panning.     All  the  gravel 

thrown  out  by  two  men  in  eight  months  of  winter  can  be 

washed  in  two  months  of  summer.     Of  course  these  deposits 

must  have  been  laid  down  at  a  time  when  the  climate  of 

that  region  was  much  warmer  than  it  is  now.     The  output 

of  the  Klondike  reached  its  maximum  (about  $21,000,000) 

in   the   year    1900,  that   of   Canada   entire   being   slightly 

under   $28,000,000.      There   has   been    a   gradual    decline 

since  that  time,  the  production  of  Canada  falling  in  1908 

to  $9,842,100.     Placer  beds  similar  to  those  of  the  Klondike 

exist  at  Cape  Nome,  Alaska.     The  yield  of  Alaska  reached 

$18,489,400  in   1907,   and  the  output  now  shows  a  yearly 

increase. 

The  most  important  gold-bearing  district  in  the  United 

States  now  is  that  of  Cripple  Creek,  Colorado.     The  ore  at 

this  place  is  a  telluride  known  to  mineralogists 
Colorado  ^^^  '       ^^  calaverite.     The  country  rock  (says  Mr. 

Philip  Argall  in  Mineral  Industry)  is  altered 
andesite,  granite,  or  phonolite,  containing  thinly  disseminated 
iron  pyrites  and  tellurium  minerals.  At  or  near  the  surface 
the  tellurium  is  oxidized,  and  the  gold,  when  visible,  exists 
as  an  ochre-like  powder,  "  mustard  gold."  By  roasting,  the 
tellurium  is  oxidized  and  the  gold  set  free  in  the  metallic 


GOLD  PRODUCTION  53 

state  easily  soluble  by  cyanide  or  chlorination.  The  yield  of 
Cripple  Creek  and  the  adjoining  territory  was  curtailed  in  the 
year  1903  to  the  extent  of  $6,000,000  by  labor  troubles. 

The  output  of  Australasia  rose  to  nearly  $89,000,000  in 
1903,  due  mainly  to  rich  workings  in  western  Australia. 
Since  that  year,  however,  there  has  been  a  gradual  decline 
in  the  annual  returns,  which  fell  to  about  $73,000,000  in 
1908,  or  $16,000,000  less  than  in  1903. 

Statistics  of  the  world's  production  of  gold 
thrce^ntSy°*       in  the  second   half   of  the  century,  as  pub- 
lished in  annual  reports  of  the  Director  of 
the  Mint,  are  as  follows: 

•  Annual  Total  of 

Period  Average  Period 

1851-1855  ........  $132,513,000  $662,566,000 

1856-1860 134,083,000  670,415,000 

1861-1865 122,989,000  614,944,000 

1866-1870 129,614,000  648,071,000 

1871-1875 115,577,000  577,883,000 

1876-1880 114,586,000  572,391,000 

1881-1885 99,116,000  495,582,000 

1886-1890 112,895,000  564,474,000 

1891-1895 162,947,000  814,736,000 

Forty-five  years      .     .     .     $124,892,000        $5,621,602,000 

Single  Years : 

1896 $202,251,600 

1897 238,812,000 

1898 287,428,600 

1899 306,584,900 

1900  (estimated) 258,000,000 

Second  half  century $6,914,679,100 

First  half  century 787,463,000 

Century $7,702,142,100 

Probably  10  per  cent  of  the  world's  gold  production 
escapes  the  notice  of  statisticians  altogether. 


54 


EVOLUTION   OF   MONEY 


The   world's  production   of  gold  from    1901   to   1908   as 
computed  by  the  Bureau  of  the  Mint  was 


I90I     .    . 

.    ^260,992,900 

1905      .     . 

.     1380,288,700 

1902     .    . 

296,737,600 

1906      .     . 

401,973,200 

1903    .  . 

.     327,702,700 

1907      .     . 

•       410,555,300 

1904    .    . 

347»377,2oo 

1908     .     . 
Total      . 

441,932,200 

.  ^2,867,559,800 

The  production  of  1908  came  from  the  following  named 
sources : 


Africa  .     .     . 

^166,520,500 

British  India . 

^10,598,500 

United  States 

94,560,000 

Canada      .     .' 

9,842,100 

Australasia    . 

73'327,3oo 

China    .     .     . 

8,647,300 

Russia  ,     .     . 

28,052,200 
22,371,200 

All  others..     . 
Total      .     . 

28,013,100 

Mexico      .     . 

^441,932,200 

The  production  of  the  United  States  in  1908  came  from 
the  following  named  sources  : 


Colorado  .     . 

.$22,871,000 

Montana   . 

.     .    $3,160,000 

Alaska .     .     . 

.    19,858,800 

Arizona     . 

.     .      2,500,000 

California .     . 

•    T9,329'7oo 

Idaho    .     . 

.     .      1,443,500 

Nevada      .     . 

.    11,689,400 

Oregon 

.     .         905,900 

South  Dakota 

.      7,742,200 

All  others . 

.     .      1,112,800 

Utah     .     .     . 

•      3*946,700 

Total      . 

.       $94,560,000 

The  world's  production  of  gold  in  1909  was  $454,422,900  ; 
that  of  the  United  States  was  $99,673,400. 

The  amount  of  gold  in  various  forms  in  Europe  and 
America  in  1848  was  estimated  by  Tooke  and  Newmarch 
(^History  of  Prices^  VI,  230)  at  $2,800,000,000,  and  of  silver 
at  $4,000,000,000,  both  metals  being  then  available  as 
money.  To  this  mass,  whether  greater  or  less,  there  was 
added  in  the  next  twenty  years  $2,000,000,000  of  gold  and 
$680,000,000  of  silver. 

It  was  the  opinion  of  Cairnes  and  Jevons  of  England,  of 
Levasseur  of  France,  and  of  Soetbeer  of  Germany,  eminent 


GOLD   PRODUCTION  55 

economists  and  statisticians  of  the  last  half  century,   that 

the  great  output  of  gold  in  the  fifties  and  sixties  had  caused 

an  average  increase  of  the  prices  of  commod- 

^^1?*  °^t2^^  ities  equal  to  about  20  per  cent.  In  some 
Gold  on  Prices.  ^  ^ 

cases  the  increase  was  greater  than  the  aver- 
age, in  others  less,  and  in  still  others  it  counteracted  a 
decline  of  price  which  would  ordinarily  have  taken  place  by 
reason  of  new  inventions  and  improved  processes  of  pro- 
duction. The  four  authorities  named,  working  independ- 
ently of  each  other,  reached  this  opinion  about  thirty  years 
ago,  and  it  may  be  accepted  as  one  of  the  established  facts 
of  statistical  science. 

The  way  in  which  new  supplies  of  gold  operate  on  prices 
will  now  be  considered.  The  essential  quality  of  gold  is 
that  it  constitutes  purchasing  power.  It  is  ^er  se  a  demand 
for  goods.  People  do  not  mark  up  the  prices  of  the  things 
they  offer  for  sale  merely  because  new  gold  mines  have  been 
discovered,  however  rich  they  may  be.  If  a  portion  of  the 
community  (gold  miners  or  others)  should  find  two  dollars 
in  their  pockets  where  there  had  been  only  one  dollar 
before,  prices  would  not  rise  in  consequence  merely  of  that 
fact.     Tradesmen  would  ask  the  same  prices 

Its  Modus  £^^  their  wares,  laborers  would  work  for  the 

Operandi.  ' 

same  wages  as  before,  buyers  would  expect 

to  receive  the  same  quantities  of  goods  for  a  dollar  as  before. 
But  the  possession  of  double  the  quantity  of  money  by  the 
fortunate  persons  would  double  their  demand  for  goods, 
and  this  increase  of  demand  would  cause  an  advance  of 
prices.  The  attempt  to  supply  the  demand  would  call  for 
more  labor  and  cause  an  advance  of  wages.  Then  the 
advance  of*  wages  would  enable  the  wage-earners  to  improve 
their  style  of  living  by  buying  more  goods,  and  there  would 
be  a  further  advance  in  prices  unless  it  should  be  counter- 
acted by  new  facilities  of  production  and  transportation. 


56  EVOLUTION    OF   MONEY 

It  was  in  this  way  that  the  new  supplies  of  gold  operated 
to  cause  the  advance  of  both  prices  and  wages  in  the 
twenty  years  succeeding  the  great  gold  discoveries  of  Cali- 
fornia and  Australia.  The  community  was  not  made  richer 
by  using  two  dollars  instead  of  one  to  transact  a  given 
amount  of  business,  but  an  advantage  was  given,  as  Profes- 
sor Cairnes  showed  at  the  time,  to  wage-earners  over  rentiers 
and  others  having  fixed  incomes.  The  former  had  steadier 
employment  and  better  pay,  and  a  fairer  chance  to  rise  in 
the  world,  while  the  latter  were  obliged  to  pay  higher 
prices  for  consumable  goods  without  any  enlargement  of 
their  income. 

Another  fact  shown  by  the  foregoing  statistical  tables 
is  that  the  production  of  gold  in  the  second  half  of  the 
century  reached  a  minimum  in  the  period  1881-1885,  the 
average  annual  output  being  less  than  $100,000,000,  and 
that  soon  afterwards  an  extraordinary  increase  took  place. 
In  the  last  decade,  1891-1900,  the  production  was  more 
than  twice  as  great  as  that  of  the  first  decade,  1851-1860. 
Why  has  not  the  same  effect  on  prices  been  noticed  as  was 
observed  after  the  great  output  of  California  and  Australia  ? 
There  has  been  some  advance  in  prices  during  recent  years, 
which  may  be  fairly  attributed  to  the  new 

tinuedldvaSca:  ^"PP"^^.  °^  2°^.  The  counteracting  forces 
of  new  inventions  and  facilities  of  production 
and  transportation,  and  the  bringing  of  new  land  under 
cultivation,  have  been  very  active  and  potent  during  this 
time.  Yet  it  is  difficult  to  escape  the  conviction  that  we 
are  now  confronted  by  another  period  of  advancing  prices, 
due  to  the  great  outpour  of  gold  described  above,  which 
seems  likely  to  continue  and  increase  for  some  years. 
In  a  recent  monograph  ^  Professor  Kemmerer  of  Cornell 

1  Money  and  Credit  Instruments  in  their  Relation  to  General  Prices^ 
by  Edwin  Walter  Kemmerer,  New  York,  1907. 


GOLD  PRODUCTION  57 

University  has  sought  to  prove  by  the  trade  and  labor  sta- 
tistics of  the  period  1879-1904  that  general  prices  in  the 
commercial  world  vary  directly  with  the  quantity  of  money 

in  use.  This  is  called  the  quantity  theory 
Theo?J*°*"^        of  money.     It  affirms  that  prices  rise  as  the 

quantity  of  money  increases,  and  vice  versa, 
provided  other  things  are  equal.  Thus  stated,  it  is  generally 
accepted  by  economists.  But  the  other  things  assumed  to 
be  equal  to-day  may  not  be  so  to-morrow.  Among  them 
must  be  reckoned  the  rapidity  of  the  circulation,  the  pro- 
gress of  invention,  the  vicissitudes  of  the  crops,  peace  and 
war  among  nations,  banking  facilities,  and  the  state  of  busi- 
ness confidence  or  depression.  Professor  Kemmerer  reckons 
bank  checks,  and  all  other  credit  instruments  which  perform 
the  office  of  money,  as  real  money  for  the  purposes  of  his 
argument.  He  attacks  the  problem  with  mathematical  for- 
mulae where  few  critics  will  have  patience  to  follow  him. 
One  such  (Professor  Persons  of  Dartmouth  College)  has 
sought  to  do  so,  and  his  conclusion  is  that  "whatever  may 
be  the  fact,  the  statistics  presented  by  Kemmerer  do  not* 
demonstrate  that  general  prices  move  in  sympathy  with  rela- 
tive circulation."  In  his  opinion  the  statistics  available  are 
not  adequate  to  answer  the  problem.^ 

The  world's  consumption  of  new  gold  in  the  arts  in  1907 
was  estimated  by  the  Bureau  of  the  Mint  at  ^135,000,000. 

RECAPITULATION 

The  production  of  gold  in  the  first  half  of  the  nineteenth 
century  was  little  more  than  sufficient  to  supply  the  amount 
used  in  the  arts  and  to  make  good  the  losses  from  abra- 
sion and  accident.  About  .the  middle  of  the  century  there 
was  a  great  increase,  due  to  discoveries  of  placer  mines  in 

1  "  The  Quantity  Theory,  as  tested  by  Dr.  Kemmerer,"  by  Warren 
M.  Persons,  Quarterly  Journal  of  Economics.,  February,  1908. 


58  EVOLUTION    OF    MONEY 

California  and  Australia.  The  annual  production  of  the 
world  was  quadrupled.  Ten  years  later  the  Comstock  lode 
of  Nevada  began  to  yield  large  amounts  of  the  precious 
metals,  $350,000,000  having  been  taken  from  it  in  about 
twenty  years,   40  per  cent  of  which  was  gold. 

In  1884  the  greatest  discovery  of  gold  the  world  has  ever 
known  was  made  in  the  Transvaal  republic  of  South  Africa. 
These  mines,  although  yet  in  their  infancy,  have  yielded 
$78,000,000  in  a  single  year.  Discoveries  only  second  in 
importance  to  those  of  South  Africa  were  made  in  the  last 
decade  of  the  century  in  the  Klondike  region  of  Canada,  in 
Alaska,  in  Cripple  Creek,  Colorado,  and  in  West  Australia. 

The  world's  gold  production  in  the  second  half  of  the 
century  was  nine  times  as  great  as  during  the  first  half. 
That  of  the  whole  century  was  nearly  eight  thousand 
millions  of  dollars. 

The  new  supplies  of  the  mid-century  caused  an  average 
advance  in  the  prices  of  commodities  of  about  20  per  cent. 
As  gold  is  purchasing  power,  new  suppHes  of  it  constitute 
new  demand  for  goods.  Prices  rise  in  consequence ;  first, 
in  the  mining  districts,  then  gradually  throughout  the  civil- 
ized world.  The  new  demand  calls  for  more  labor  and 
leads  to  an  increase  of  wages.  The  wage-earners  are  ena- 
bled to  buy  more  goods,  and  this  causes  a  further  advance 
of  prices.  A  redistribution  of  earnings  takes  place  to  the 
advantage  of  the  producing  classes  and  to  the  disadvan- 
tage of  those  having  fixed  incomes.  Prices  of  commodities 
follow  the  law  of  supply  and  demand  in  this  case  as  in 
others. 

The  new  supplies  of  gold  in  the  last  decade  of  the  nine- 
teenth century  and  in  the  first  decade  of  the  twentieth  appear 
to  have  caused  an  advance  of  prices. 


GOLD    PRODUCTION  59 

Authorities  for  Chapters  IV  and  V 

Jacob's  The  Precious  Metals. 

Cairnes'  Essays  in  Political  Economy  ("  The  Gold  Question  "). 

Jevons'  "  On  the  Variation  of  Prices  and  the  Valuation  of  the 
Currency  since  1787,"  in  the  Journal  of  the  Statistical  Society  of 
London,  June,  1865. 

Tooke  and  Newmarch's  History  of  Prices^  Vol.  VI. 

Lock's  Gold,  Its  Occurrence  and  Extraction. 

Percy's  Metallurgy,  Silver  and  Gold. 

Phillips  and  Louis'  On  Ore  Deposits. 

Rothwell's  Mineral  Industry  (annual). 


CHAPTER   VI 
THE  GOLD  STANDARD 

Speaking  broadly,  it  may  be  said  that  the  ancient  world 
had  the  double  standard  of  silver  and  gold ;  that  the  single 
silver  standard  prevailed  during  the  Middle  Ages,  from  the 
seventh  century  to  the  thirteenth ;  that  the  double  standard 
was  then  reintroduced  and  prevailed  in  Europe  and  America 
till  the  beginning  of  the  nineteenth  century,  and  that  it  has 
now  been  superseded  by  the  single  gold  standard. 

The  gold  florin,  first  coined  by  the  city  of  Florence  about 
the  year  1252,  was  introduced  to  meet  the  needs  of  the 
growing  commerce  of  the  Italian  republics.  The  conven- 
ience of  gold  in  making  large  payments  had  been  observed 
by  the  crusaders  at  Byzantium.  The  idea  of  a  gold  cur- 
rency was  brought  back  in  this  way  to  Western  Europe, 
from  which  it  had  disappeared  long  before  in  the  penury  of 
the  dark  ages.  Gold  thus  became  an  addition  to,  not  a 
substitute  for,  silver  money,  and  thus  the  double  standard 
was  reestablished. 

The  market  values  of  the  two  metals,  gold  and  silver,  are 
subject  to  the  law  of  supply  and  demand  like  other  com- 
modities ;  they  are  liable  to  change  of  value  with  reference 
to  each  other.     Sixteen  pounds  of  silver  may 

Market  Values      bg  worth  more  than  one  pound  of  gold  to- 
of  the  Precious        .  ,   ,  ,  .  ^  r     1 

Metals.  day,  and  less  at  another  day.     One  of  them 

may  be  in  greater  demand  in  India  than  in 
England,  and  so  on.  There  are  persons  in  every  com- 
munity (bankers,  brokers,  and  bullion  dealers)  who  seek  to 

60 


THE   GOLD   STANDARD  6 1 

make  a  profit  out  of  these  changes  by  exporting  or  melting 
coins.  Theirs  is  a  perfectly  proper  vocation,  as  legitimate 
as  the  getting  of  gain  from  any  mercantile  transaction,  yet 
it  has  been  held  in  great  opprobrium  at  some  periods  in 
the  world's  history,  has  been  treated  as  a  crime,  and  severe 
laws  have  been  passed  to  punish  persons  guilty  of  it.  The 
community  was  put  to  inconvenience  by  finding  either  gold 
or  silver  coins  growing  scarce  in  the  circulation.  These 
were  called  "coins  of  the  realm."  They  were  regarded  as 
belonging  in  a  peculiar  sense  to  the  country  whose  stamp 
they  bore,  whereas  they  were  the  exclusive  property  of 
individuals,  who  had  the  same  right  to  dispose  of  them  as 
of  their  sheep  or  oxen.  The  enactments  in  various  coun- 
tries against  trading  in  the  precious  metals,  and  especially 
against  exporting  or  melting  them,  form  a  remarkable 
chapter  of  human  fatuity  and  folly.  It  was  impossible 
to  execute  the  laws  passed  for  this  purpose.  A  remedy 
for  the  alternate  drains  of  gold  and  silver  was  accordingly 
sought  by  changing  the  legal  ratio.  "In  France,"  says  Mr. 
W.  A.  Shaw,^  "  the  ratio  of  gold  to  silver  was  changed  in  a 
single  century  more  than  one  hundred  and  fifty  times."  To 
enumerate  all  the  changes  of  ratio  that  took  place  in  Europe 
from  the  middle  of  the  thirteenth  century  to  the  beginning 
of  the  nineteenth  would  be  a  hopeless  undertaking. 

The  true  solution  of  these  difficulties  was  first  reached  in 
England.     This   country  had   had  her   share    of   the   loss 

and  vexation   due  to   changes    of   the  ratio. 
England  ^^°*        She  had   also  visited  cruel    punishments  on 

individuals  for  melting  and  exporting  the 
precious  metals.  All  attempts  to  enforce  these  foolish  laws 
were  eventually  abandoned,  and  it  came  to  pass  in  the  reign 
of  Charles  II  that  the  guinea  of  gold,  although  proclaimed 
by  royal  authority  to  be  the  equivalent  of  20s.  in  silver, 
1  History  of  Currency,  P«  3i« 


62  EVOLUTION    OF   MONEY 

passed  in  trade  for  21s.,  and  no  attempt  was  made  by  the 
government  to  interfere.  The  guinea  remained  as  a  trade 
coin  till  the  third  year  of  George  I  (17 17),  when  another 
proclamation  was  issued  making  it  legally  equal  to  21s.,  at 
which  figure  the  ratio  to  silver  was  about  15^  to  i. 

As  gold  was  slightly  overrated  at  the  ratio  of  15I,  there 
was  a  tendency  to  export  silver ;  and  for  this  purpose  the 
full-weight  coins  were  selected.  So  it  came  about  in  the 
course  of  half  a  century  that  the  only  silver  coins  remaining 
in  circulation  were  those  which  had  been  much  reduced  in 
weight  by  abrasion  or  by  fraudulent  clipping.  The  evil 
became  so  intolerable  that  Parliament,  in  1774,  passed  a 
law  providing  that  silver  coin  should  not  be  legal  tender  for 
more  than  ^25  in  one  payment,  except  by  weight  at  the 
rate  of  5^-.  2^/.  per  ounce.  It  was  enacted  at  the  same  time 
that  gold  coins  deficient  in  weight  should  be 
called  in  and  recoined,  and  that  thereafter 
such  coins,  if  under  a  certain  weight,  should  not  be  legal 
tender  at  all.  The  restriction  of  the  legal  tender  of  silver 
was  to  continue  two  years.  The  expectation  of  Parlia- 
ment was  that  some  effectual  and  permanent  steps  would 
be  taken  to  deal  with  the  evil  of  light  coins  in  that  inter- 
val, but  since  nothing  was  done,  the  act  of  1774  was 
renewed  in  1776  for  two  years  more.  In  1778  it  was 
renewed  for  seven  years,  and  then  by  repeated  renewals  it 
was  carried  forward  to  1798.  Another  clause  was  now 
added  that  no  more  silver  should  be  coined  at  the  mint  for 
private  persons. 

The  significance  of  this  legislation  was  not  perceived  at 

the  time.     It  had  not  been  the  intention  of  Parliament  to 

establish  the  single  gold  standard.    The  ques- 

ATentative  ^-^^  ^£  standard  was  not  under  consideration 

otep. 

at  all.     What  Parliament  did  in    1774   was: 

(i)  to  put  the  gold  coin  in  a  state  of  perfection  by  recoining 


THE   GOLD    STANDARD  6$ 

the  defective  pieces  and  making  light  coins  unavailable  in 
payments  thereafter;  (2)  to  limit  the  legal-tender  faculty 
of  the  silver  money  then  in  circulation.  The  mint  was  still 
open,  and  anybody  could  have  silver  bullion  coined  into 
money  of  full  weight  and  full  legal  tender.  But  since  silver 
was  undervalued  at  the  ratio  of  15^,  nobody  would  take  it 
to  the  mint.  Thus  all  the  conditions  of  the  single  gold 
standard  were  in  practical  operation  without  any  fixed  inten- 
tion of  Parliament  to  bring  it  about,  or  any  knowledge  that 
it  had  been  done.^ 

It  was  noticed,  however,  that  the  inconveniences  of  a 
shifting  ratio  had  disappeared.     There  was  plenty  of  gold 

money   for    large  transactions   and    of    silver 
d  ^t  d   ^"         money  for  small   ones.     Although  the   silver 

coins  were  deficient  in  weight,  they  answered 
the  purposes  of  small  change.  After  the  experience  of  a 
quarter  of  a  century,  Parliament  and  people  were  convinced 
that  the  act  of  1774,  although  adopted  as  a  temporary 
measure,  ought  to  be  made  permanent.  Accordingly  it 
was  made  so  in  1799.  Yet  it  was  not  until  18 16  that  the 
true  philosophy  of  the  step  was  well  enough  understood  to 
secure  its  enactment  into  a  settled  law.  In  that  year  it  was 
enacted  that  the  gold  coin  of  the  realm,  when  of  full  weight, 
should  be  full  legal  tender  and  should  be  coined  for  pri- 
vate persons  to  any  amount,  and  that  silver  coin  should  not 
be  legal  tender  for  more  than  40^".  in  one  payment,  and 
should  be  coined  only  on  government  account  and  should 

1  "  The  fact  that  a  change  in  the  monetary  standard  of  the  country, 
while  it  was  in  actual  process  of  accomplishment  under  their  eyes,  could 
have  escaped  the  recognition  of  contemporary  observers,  seems  at  first 
sight  to  be  of  so  marvelous  a  character  as  to  pass  the  bounds  of  belief. 
Yet  that  it  was  a  fact  is  beyond  all  question."  —  Carlile's  Evolution  of 
Modern  Money,  p.  18.  The  truth  was  pointed  out  by  Lord  Liverpool 
in  1805  and  Mr.  Carlile  properly  calls  it  "  a  genuine  stroke  of  genius  " 
on  his  part. 


64  EVOLUTION   OF   MONEY 

be  reduced  in  weight  6  per  cent.  This  law,  which  estab- 
lished the  single  gold  standard,  remains  in  force  to  the 
present  day. 

In  1853  the  United  States  followed  the  example  of  Great 
Britain,  by  reducing  the  weight  of  its  silver  coins  smaller 

than   $1.00    and    making    them   legal    tender 
The  United  States  r  i      <*  •  ^       rr.,         ^   ^ 

and  Portugal.  ^°^  ^"^7  ^5-oo  ^  one  payment.  The  states- 
men who  passed  this  law  supposed  that  they 
were  adopting  the  single  gold  standard,  but  this  was  not 
legally  accomplished  until  1873,  as  has  been  explained  in 
Chapter  III. 

The  kingdom  of  Portugal  adopted  the  single  gold  standard 
in  1854. 

In  the  year  1857  the  states  composing  the  German  Zoll- 
verein  and  the  empire  of  Austria  entered  into  a  monetary 
treaty  by  which  they  adopted  the  single  silver 
Germany!^  °*  Standard.  The  treaty  provided  that  any  of 
the  contracting  states  might  coin  gold  crowns 
and  half  crowns  to  circulate  at  their  market  value.  It  was 
expressly  stipulated  that  these  should  not  be  legal  tender. 
They  might  be  received  at  the  public  treasuries,  however, 
at  rates  to  be  fixed  by  the  respective  governments  at  least 
once  every  six  months,  but  the  rate  should  not  be  higher 
than  the  average  commercial  rate  for  the  preceding  six 
months.  The  official  rate  might  be  changed  oftener  if  the 
market  rate  should  make  such  change  necessary. 

It  happened  at  this  time  that  France  was  importing  gold 
and  exporting  silver  on  a  very  large  scale.  As  the  market 
ratio  was  now  15.27  and  the  legal  ratio  15.50,  there  was  a 
profit  to  bullion  dealers  of  i^  per  cent  in  the  traffic.  The 
gold  crowns  of  Germany  were  drawn  to  Paris  as  fast  as  they 
came  from  the  mints,  and  the  country  was  left  with  silver 
coins  only  for  lier  domestic  trade.  These  were  so  bulky 
and   inconvenient   that   they   were   largely   supplanted   by 


THE    GOLD    STANDARD  65 

issues  of  bank  notes  which  were  subject  to  varying  rates  of 
discount  in  different  cities  and  states.  This  condition  was 
considerably  aggravated  by  the  heterogeneous- 
ness  of  the  silver  coins  of  the  several  states  -^ 
thalers,  marks,  florins,  gulden,  kreutzers,  etc.  There  was  a 
very  general  demand  for  a  uniform  system  of  coins ;  and, 
when  the  question  was  brought  up  for  solution  after  the 
consolidation  of  the  German  Empire,  it  was  decided  by  the 
government  to  make  gold  the  standard,  with  a  silver  sub- 
sidiary currency  —  in  other  words,  to  adopt  the  English 
system.  The  first  bill  for  this  purpose  became  a  law 
December  4,  187 1.  It  discontinued  the  coinage  of  silver 
except  for  the  government.  It  provided  for  the  coinage  of 
ten-mark  pieces  of  gold  (equal  to  $2.38),  of  which  139J 
should  contain  one  pound  of  pure  metal ;  also  twenty-mark 
pieces  of  double  the  weight ;  and  all  gold  coins  were  made 
unlimited  legal  tender.  For  the  purpose  of  settling  preex- 
isting contracts  and  of  exchanging  gold  for  silver  coins,  it 
established  the  ratio  of  15^,  which  was  the  market  ratio  at 
the  time.  Provision  was  made  for  calling  in  and  melting  the 
outstanding  silver  money  and  exchanging  gold  for  it  out  of 
the  funds  in  the  Imperial  Treasury  —  practically  the  French 
war  indemnity.     Another  law  containing  further  details  was 

passed   July   o,    1873.      This    law    definitely 
Act  of  1873.  ,,.  1      /1  ,1  ,      ,         ,  .,    , 

established  the  gold  standard  and  provided  a 

new  subsidiary  coinage  based  upon  the  silver  mark,  which 
should  be  legal  tender  for  only  twenty  marks  in  one  pay- 
ment. It  was  provided  that  the  old  thalers  (three-mark 
pieces)  should  be  full  legal  tender  as  long  as  they  should 
remain  in  circulation.  Under  the  law  for  taking  in  and 
melting  the  old  silver  coins  upwards  of  7,000,000  pounds 
weight  of  fine  silver  were  sold  in  the  open  market  between 
1873  and  1879.  The  price  of  silver  declined  gd.  per 
ounce  during  that  time.     The  sales  were  then  suspended, 


66  EVOLUTION    OF   MONEY 

leaving  339,000  pounds  of  silver  bullion  in  the  Imperial 
Treasury. 

An  order  was  issued  in  the  year  1900  to  convert  the 
residue  of  bullion  into  silver  subsidiary  coins  during  the 
next  ten  years.  There  are  still  in  circula- 
Treasury  Order  ^^^^  ^^  Germany  about  125,000,000  of  silver 
thalers,  or  three-mark  pieces,  which  are  full 
legal  tender.  They  occupy  the  same  position  as  our  silver 
dollars  and  the  French  five-franc  pieces.  The  Imperial  Bank, 
or  any  other  bank  in  Germany,  can  pay  them  out  at  par  in  liqui- 
dation of  all  claims  against  them.  While  this  condition  exists 
Germany  cannot  be  considered  strictly  on  the  gold  basis. 

There    was    a   brief   bimetallist   revival   in    Germany   in 

1894-96.      It  grew  out  of  the  low  price  of   grain,  which 

was  erroneously  ascribed  by  the  landowners,  or  Agrarian 

party,  to  the  demonetization  of  silver.     Chancellor  Caprivi 

so  far  yielded  to  the  demands  of  this  party  as  to  authorize  a 

commission  to  investigate  the  question.     It  consisted  of  six 

teen  members,  and   it  held  twenty-one  sessions   and  took 

a  large  amount  of  testimony,  but  came  to  no 

Bimetallist  Agi-  j-ggolution  whatever.  Soon  after  this  com- 
tation  Ineffectual. 

mission   came  to  an  end  Chancellor  Caprivi 

retired  from  office  and  was  succeeded  by  Prince  Hohenlohe. 
Thereupon  the  Agrarians  in  the  Reichstag  started  up  afresh 
and  on  the  i6th  of  February,  1895,  prepared  a  motion  asking 
the  government  to  take  the  initiative  in  calling  a  new  inter- 
national monetary  conference.  This  motion  was  supported 
by  a  large  majority  of  the  Reichstag,  and  the  government 
somewhat  reluctantly  referred  it  to  the  Bundesrath,  whose 
consent  was  necessary.  Nearly  a  year  was  consumed  in  the 
deliberations  of  the  several  states  composing  the  Bund.  On 
the  1 6th  of  February,  1896,  Prince  Hohenlohe  announced 
that  the  German  states  had  unanimously  rejected  the  motion 
to  convoke  an  international  monetary  conference. 


THE   GOLD    STANDARD  67 

In  1874  Sweden  and  Norway  followed  the  example  of 
Germany  by  adopting  the  gold  standard,  and  Holland  did 
the  same  in  1875. 

At  the  beginning  of  the  nineteenth  century  France  had 
the  double  standard  at  the  ratio  of  15^.  This  ratio  had 
been  adopted  in  1785,  at  the  instance  of 
Llw'of^LT^'^  Calonne,  Comptroller-General.  The  Revolu- 
tion came  on  and  the  monetary  system  was 
plunged  in  chaos  by  issues  of  irredeemable  paper  so  vast 
that  they  could  only  be  cleared  off  by  repudi'cttion.  Then 
the  statesmen  of  the  republic  passed  the  coinage  law  of 
1803,  intending  to  establish  the  single  standard  of  silver. 
The  law  began  with  a  general  provision  that  five  grams  of 
silver  y%  fine  should  constitute  the  monetary  unit  bearing 
the  name  of  the  franc.  The  measure  was  before  the  legis- 
lative body  three  years.  Eight  reports  were  made  upon  it, 
the  point  in  controversy  being  the  various  methods  proposed 
for  utilizing  gold  in  the  currency  while  making  silver  the 
sole  standard.  No  decision  was  ever  reached  on  this  point, 
but  at  the  last  moment  a  clause  was  added  to  the  bill  pro- 
viding that  gold  pieces  of  20  francs  should  be  coined  at 
the  rate  of  155  to  the  kilogram.  Under  this  law  five  grams 
of  silver  would  constitute  i  franc,  and  five  grams  of  gold 
15I-  francs.  The  debates  and  reports  show  that  there  was 
a  general  understanding  that  if  the  market  ratio  should 
change  so  as  to  make  a  recoinage  necessary,  the  gold 
should  be  recoined  and  the  silver  franc  kept  as  the  invari- 
able measure  of  value.  There  was  nothing  on  the  subject 
of  legal  tender  in  the  law,  but  since  al^  debts  were  payable 
in  francs,  and  since  two  kinds  of  francs  were  authorized  to 
be  coined,  the  law  really  established  the  double  standard  at 
the  ratio  of  15-^,  which  ratio  already  existed  by  virtue  of 
the  law  of  1785. 

It  has  been  frequently  asserted  that  the  French  law  of 


68  EVOLUTION   OF   MONEY 

1803  kept  the  market  ratio  of  the  two  metals  steady  at  the 
legal  jratio,  i.e.^  at  15!-,  until  1873.  This  is  an  entire  mis- 
take. There  were  only  six  years  in  the  seventy  in  which 
the  market  ratio  was  approximately  15^.  These  were  1806, 
1807,  1811,  1820,  1851,  and   1867.     In   1821 

Did  not  keep  the  gold    money    had    nearly   disappeared    from 
Market  Ratio  °  /  ,         .        ,     /  .        ,     ^     ., 

Steady.  l^rance  and  the  circulation  consisted  of  silver 

exclusively,  and  so  continued  until  1851,  when 
the  great  outflow  of  gold  from  California  and  Australia 
cheapened  that  metal,  putting  the  market  ratio  below  \^\. 
The  ratio  remained  below  15  J  till  1867.  During  that  inter- 
val France  imported  gold  to  the  amount  of  $600,000,000, 
and  exported  so  much  of  her  silver  to  India  that  she  suffered 
inconvenience  for  the  want  of  small  change.  She  was  com- 
pelled to  coin  gold  pieces  as  small  as  five  francs.  The 
government  attempted  at  first  to  adopt  the  English  system 
of  subsidiary  silver  coins,  limiting  their  legal-tender  faculty 
to  fifty  francs  in  one  payment.  Accordingly  in  1864  it 
brought  before  the  Corps  Legislatif  a  bill  lowering  the  fine- 
ness of  the  coins  smaller  than  five  francs  to  xWo'  ^^^^ 
reducing  their  value  about  7  per  cent.  The  next  step  taken 
was  the  formation  of  the  Latin  Monetary  Union. 

This  was  an  attempt,  beginning'in  the  year  1865,  to  estab- 
lish uniform  coinage  on  a  bimetallic  basis,  with  concurrent 
circulation,  by  treaty  among  four  European  countries  (France, 
Belgium,  Switzerland,  and  Italy),  in  which  bimetallism  already 
prevailed.    The  union  proved  to  be  an  embarrassment  to  all 

the  nations  concerned,  and  resulted  in  the 
Moneury  union,    adoption  of  the  single  gold  Standard  by  all  of 

them  in  succession.  This  change  was  adopted 
by  simply  discontinuing  the  coinage  of  silver  for  private  indi- 
viduals and  limiting  it  to  subsidiary  coins  struck  on  govern- 
ment account.  The  union  still  exists,  but  it  has  been  a  source 
of  trouble,  waste,  and  loss  to  all  the  countries  so  united. 


THE  GOLD   STANDARD  69 

Under  the  treaty  of  1857  with  the  states  of  the  German 
Zollverein  the  single  silver  standard  prevailed  in  Austria- 
Hungary,  but  the  currency  in  actual  use  was 

Austria-Hungary.    .         ,  ,  ,  t., 

irredeemable  paper.  The  monetary  unit  was 
the  silver  florin,  the  normal  value  of  which  was  45.3  cents  of 
our  money.  In  1879,  in  consequence  of  the  heavy  decline 
in  the  price  of  silver,  the  government  gave  orders  to  the 
mints  in  both  Austria  and  Hungary  to  receive  no  more  of 
that  metal  from  private  individuals  for  coinage.  The  effect 
of  this  order  was  to  make  government  paper  money  the 
standard,  and  this  paper  varied  somewhat  from  day  to  day 
in  comparison  with  gold,  but  it  no  longer  followed  the  down- 
ward course  of  silver.    The  paper  florin  was  worth  in  1879 

about  42  cents.    In  1892,  before  the  currency 

sSm  LTa.  '^f°™  ^^'  ^'i°Pt^'^' ''  ^^=  ""-^^  41  cents.  If 
it  had  kept  pace  with  the  decline  of  silver,  it 
would  have  been  worth  only  30  cents.  Austria  had  a  gold 
coinage  at  this  time,  but  it  was  not  legal  tender.  In  1892 
she  decided  to  resume  specie  payments  in  gold.  She  first 
fixed  a  ratio  at  which  all  paper  money  and  paper  obliga- 
tions should  be  redeemable.  The  ratio  decided  upon  was 
119  paper  to  100  gold,  as  this  had  been  the  average  ratio 
prevailing  in  the  market  during  the  thirteen  years  from 
1879  to   1892. 

The  next  step   taken  was   to  pass  a  coinage   law.    The 
krone   (crown)  of  gold  was  made  the   monetary  unit,  con- 
taining 4.7  grains  of  fine  gold,  the  ten-crown  piece  being 
worth  $2,026  of  our  money.     Silver  was  to  be 
o^ersmdi^^  coined  only  for  the  government  and  to  be  legal 

tender  for  fifty  crowns.  The  government  was 
authorized  to  borrow  gold  sufficient  to  redeem  its  outstand- 
ing notes  amounting  to  312,000,000  florins.  Gold  to  the 
amount  of  112,000,000  florins  was  borrowed,  and  this,  to- 
gether with  some  reserves  in  the  Treasury,  was  applied  to 


yo  EVOLUTION  OF  MONEY 

the  purpose  of  retiring  200,000,000  of  the  notes.  The 
method  adopted  was  not  direct  redemption.  The  govern- 
ment deposited  the  gold  in  the  Austro-Hungarian  Bank 
and  redeemed  its  own  notes  partly  with  bank  notes  and 
partly  with  new  silver  money  which  was  needed  to  replace 
the  small  notes  thus  retired.  In  this  way  200,000,000  florins 
of  old  notes  were  withdrawn  and  canceled  before  the  end  of 
the  year  1897,  leaving  only  112,000,000  outstanding.  When 
this  was  accomplished  the  value  of  the  paper  florin  became 
very  nearly  equal  to  gold  of  the  new  standard.  There  is  now 
no  premium  on  gold  in  Austria-Hungary. 

After  many  struggles  with  the  double  standard  the  single 
standard  of  silver  was  established  in  British  India  in  the 
year  1835,  the  unit  of  value  being  the  rupee.     Prior  to  1873 

this  coin  was  worth  about  \s.  \o\d.,  but  was 
British  India.  .      * 

usually    reckoned    as   the    equivalent    of    2s., 

or  48  cents,  the  price  of  silver  being  about  (yod.  per  ounce. 
With  the  gradual  growth-  of  commerce  the  inconvenience  of 
silver,  on  account  of  its  bulk  and  weight,  became  oppress- 
ive. Hence  as  early  as  1859  the  commercial  classes  of 
the  country  began  to  urge  the  government  to  adopt  the 
gold  standard,  with  silver  as  subsidiary,  but  nothing  was 
done  until   1893. 

On  the  2ist  of  June,  1892,  the  government  of  India  trans- 
mitted to  the  home  government  a  report  and  plan  for  cur- 
rency reform  prepared  by  Sir  David  Barbour, 
G^fsind'aM.^  financial  secretary  of  India.  In  this  report 
it  was  considered  impossible  to  establish  in 
India  a  currency  composed  entirely  of  gold,  yet  the  example 
of  France  and  of  other  countries,  which  had  the  gold  stand- 
ard but  maintained  a  large  circulation  of  silver  of  full  legal 
tender,  pointed  to  the  conclusion  that  the  gold  standard 
could  be  established  in  India  without  a  large  accumulation 
of  gold.     Sir  David  avowed  himself  a  bimetallist  in  principle, 


THE   GOLD    STANDARD  71 

but   in   the    event  of    a  failure   of    the    Brussels   Monetary 

Conference  he  thought  that  an  attempt  should  be  made  to 

establish  the  gold  standard  in  India.     The  government  of 

India  requested  permission  to   discontinue  the   coinage  of 

silver  for  private  persons.      The  subject  was  referred  to  a 

committee  of  seven,  of  which  Lord  Herschel  was  chairman. 

The  Committee's  labors  extended  over  a  period   of   seven 

months.     On  the  31st  of  May,  1893,  it  recommended  that 

the  request  of  the  government  of  India  for  permission  to 

close  the  mints   against  silver,  retaining  the  right  to  coin 

rupees   on   government   account,  be   granted. 

The  Herschel         j^  order,  however,  to  guard  against  any  sud- 
Commission  ,  ,    ,  ,  .         ,  ,  r     i 

of  1893.  den  and   large  advance  m   the  value   of  the 

rupee  on  account  of  its  scarcity,  it  was  recom- 
mended that  the  government  should  announce  that  it  would 
give  rupees  for  gold  at  the  rate  of  i6d.  per  rupee  and 
would  receive  gold  for  taxes  at  that  rate.  The  recom- 
mendations of  the  Committee  were  approved  by  the  home 
government  and  were  promulgated  by  the  government  of 
India  on  the  26th  of  June,  1893.  The  first  effect  of  the 
closing  of  the  Indian  mints  was  a  heavy  fall  in  the  price 
of  silver.  The  price  at  the  beginning  of  June,  1893,  was 
38!^.  per  ounce.  After  the  announcement  was  made  it 
fell  to  2'j^d.  The  price  of  rupees  fell  gradually  to  13^., 
but  rose  during  the  next  five  years  to  i6d.  As  the  quan- 
tity of  rupees  in  circulation  could  not  be  increased,  they 
began  to  have  a  "scarcity  value."  In  other  words,  the 
demand  for  them,  due  to  the  growth  of  business,  exceeded 
the  supply,  and  raised  the  price  to  16 d. 

In  March,  1898,  a  committee  of  thirteen,  with  Sir  Henry 
H.  Fowler,  M.P.,  at  its  head,  was  appointed  by  the  Anglo- 
Indian  government  with  a  view  'to  the  completion  of  the 
policy  initiated  in  1893.  The  Committee  made  a  report 
July  7,  1899.     It  said  that  it  was  deemed  important  to  assure 


72  EVOLUTION   OF   MONEY 

the  world  that  India  was  not  to  take  any  backward  step  from 
the  position  already  assumed.    Events  had  been,  on  the  whole, 

propitious  since  1893,  the  value  of  the  rupee 

Fowler  Committee  i*  •  1  r-.  -^.a-? 

Qj^g^  havmg  risen  by  reason  of  its  scarcity  to  i6d. 

and    remained    stable    within    the    ordinary 

fluctuations    of    exchange.       Inasmuch  as   the  public   had 

come  to  regard    16 d.  as  the  par  value   of  the  rupee,  and 

since  business  had  adjusted  itself  to  that  ratio,  it  was  deemed 

best  to  maintain  it. 

Gold  was  made  legal  tender  in  India  by  Act  22  of  1899, 
at  the  rate  of  fifteen  rupees  to  the  sovereign.  In  the  budget 
statement  issued  at  Calcutta  in  March,  1900,  it  was  said  that 
the  government  has  accumulated  upwards  of  ;^8, 000,000  in 
gold,  and  that  it  intended  to  retain  not  less  than  ;^5,ooo,- 
000  as  a  permanent  reserve.  It  is  believed  that  the  rupee 
can  be  maintained  at  par  without  any  large  accumulation  of 
gold  in  the  Treasury. 

Prior  to  1897  Japan  had  the  double  standard  in  law  but 
the  single  silver  standard  in  practice.  She  had  been  under 
the  regime  of  irredeemable  paper  from  1873 
Goirste^dlrd!"'  ^°  ^^^^-  ^^  the  latter  year  she  had  resumed 
specie  payments  in  silver.  The  decline  in 
the  price  of  that  metal  and  the  consequent  disturbance  of 
the  foreign  exchanges  induced  the  government,  in  1893,  to 
appoint  a  commission  to  make  inquiries  concerning  the 
coinage  system  and  the  monetary  standard.  This  commis- 
sion remained  in  session  twenty-two  months.  It  made  its 
report  in  July,  1895,  a  majority  of  the  members  recom- 
mending the  adoption  of  the  single  gold  standard. 

The  war  between  China  and  Japan  took  place  the  same 
year,  and  the  Chinese  indemnity  fund,  equal  to  ;^38, 000,000 
sterling,  put  in  the  hands  of  Japan  the  means  to  carry  this 
monetary  reform  into  effect  with  very  little  delay.  It  was 
stipulated  in  the  treaty  of  peace  that  the  indemnity  should 


THE   GOLD   STANDARD  73 

be  paid  in  London  in  English  money.    The  law  to  carry  the 
reform  into  effect  was  passed  in  May,  1898. 

At  that  time  the  market  ratio  of  silver  to  gold  was  about 
32  to  I.     The  gold  yen  of  the  old  coinage  was  in  circula- 
tion   as    commercial  money   and   was   worth 

T.l  TZ  ^°'''"      about  double  the  value  of  the  silver  yen.     It 
age  Law.  J 

was  decided  to  make  the  gold  yen  the  unit  of 
value,  and  to  make  it  approximately  equal  to  the  value  of 
the  silver  yen  at  that  time.  For  convenience  in  reckoning, 
and  in  order  to  keep  the  gold  yen  of  the  former  coinage  in 
circulation,  the  new  yen  was  given  exactly  one-half  the 
metallic  content  of  the  old  one.  The  fineness  is  nine- 
tenths.  The  weight  of  the  ten-yen  piece  is  8.3333  grams, 
and  its  value  is  $4.98.  The  gold  pieces  authorized  to  be 
struck  at  the  mint  are  those  of  5,  10,  and  20  yen.  All 
gold  coins  were  made  unlimited  legal  tender,  the  old  yen 
to  circulate  at  double  the  value  of  the  new.  The  gov- 
ernment receives  and  coins  without  charge  all  gold  of 
standard  fineness  brought  to  the  mint  at  Osaka. 

The  coinage  of  silver  for  private  persons  was  discon- 
tinued. It  was  provided  that  each  silver  yen  of  the  old 
coinage  should  be  redeemed  with  a  gold  yen  of  the  new 
coinage  if  presented  before  July  31,  1898,  and  after  that 
date  be  regarded  as  bullion  only.  The  new  silver  coins 
authorized  are  pieces  of  50  sen,  20  sen,  and  10  sen,  the  sen 
being  the  hundredth  part  of  a  yen.  Silver  coins  are  legal 
tender  for  10  yen  only.  There  are  also  small,  coins  of 
nickel  and  bronze  called  "  rin,"  which  are  legal  tender  for 
one  yen.     The  rin  is  the  tenth  part  of  the  sen. 

The  coinage  law  of  Japan  contains  a  provision  that  if,  in 
consequence  of  abrasion  from  circulation,  any  of  the  gold 
coins  fall  below  the  minimum  circulating  weight,  the 
government  shall  exchange  such  coins  for  others  of  the 
same  face  value   without   making   any   charge.      In    other 


74  EVOLUTION    OF    MONEY 

words,  the  government  insures  its  gold  coins  against  loss 
by  ordinary  wear. 

The  whole  amount  of  one-yen  silver  coins  redeemed 
under  this  law  was  75,093,822  yen.  Of  this  sum  25,567,011 
was  set  apart  for  minting  new  subsidiary  silver  coins,  and 
the  remainder  was  sold  at  Hong  Kong,  Shanghai,  and 
elsewhere.-^ 

Russia  suspended  the  coinage  of  silver  for  private  indi- 
viduals on  the  9th  of  September,  1876.  Prior  to  that  time 
she  had  had  the  single  silver  standard  nominally,  but  had 
been  under  the  regime  of  irredeemable  paper.  This  paper 
was  quoted  in  terms  of  gold  in  all  transactions  of  any  mag- 
nitude. In  other  words,  gold  was  in  practice  the  standard 
of  the  Russian  mercantile  classes.  The  value  of  the  legal- 
tender  notes  was  measured  in  it  from  day  to 
Golf  stafdard^^'  ^^y-  ^^^  g°^^  imperial  was  in  circulation  as 
commercial  money.  Its  normal  value  was  10 
roubles  30  copecks  in  paper.  When  the  price  of  silver  had 
declined  so  that  10  roubles  30  copecks  of  paper  would  buy 
silver  bullion  which  would  yield  a  greater  sum,  by  coining 
at  the  mint,  the  government  suspended  the  free  coinage  of 
that  metal  and  set  its  face  toward  the  gold  standard.  Vari- 
ous steps  were  taken  to  this  end  at  different  times  during 
the  succeeding  twenty-three  years.  They  culminated  in  the 
law  of  June  7  (19),  1899,  by  which  the  gold  standard  was 
definitely  adopted. 

It  was  decreed  that  the  ratio  between  the  old  currency 
rouble  and  the  new  gold  rouble  should  be  as  i^^  to  i,  and 
that  this  rating  should  apply  to  all  past  contracts,  public 
and  private.  A  person  owing  150  roubles  could  pay  the 
debt  with   100  roubles  after  the  resumption  of  specie  pay- 

1  See  report  on  the  adoption  of  the  Gold  Standard  in  Japan,  by 
Count  Matsukata  Masayoshi,  Minister  of  Finance,  Tokio,  1899. 


THE   GOLD   STANDARD  75 

ments,  but  these  would  be  gold  roubles.    This  act  has  been 
severely  criticised,  as  though  it  were  equivalent  to  repudia- 
tion of   one-third    of    all    debts.      On   the  contrary,  if  the 
single  silver  standard  had  remained  in  force, 

coinage'' lIw.  ^^1  ^^^^s  ^^^^^  ^^v^  ^^^"  scaled  down  50 
per  cent  or  more,  instead  of  ^;^^  per  cent. 
A  debt  of  150  roubles  could  in  that  case  have  been  paid 
with  75  gold  roubles  or  less. 

The  gold  rouble  was  made  the  monetary  unit  of  the 
empire,  containing  17.424  doli  (about  12  grains)  of  fine 
gold.  The  smallest  gold  coin,  however,  is  the  five-rouble 
piece,  containing  87.12  doli  (59.7413  grains)  of  fine  gold. 
Gold  pieces  of  5,  7 J,  10,  and  15  roubles  are  to  be  struck. 
The  imperial,  of  fifteen  roubles,  is  equal  to  $7,718.  All  gold 
brought  to  the  mint  either  by  the  government  or  by  private 
individuals  is  to  be  coined.  The  standard  of  fineness  is  ^^. 
Gold  coins  are  legal  tender  without  limit.  Silver  and  cop- 
per are  coined  only  for  the  government.  Silver  roubles  and 
half  and  quarter  roubles  are  legal  tender  for  25  roubles  in 
one  payment.  Smaller  silver  and  copper  coins  are  legal 
tender  for  3  roubles  only.  The  rouble  is  divided  into  100 
copecks.     The  smallest  silver  coin  is  5  copecks. 

Mexico  adopted  the  gold  standard  in  1906. 

During  the  last  quarter  of  the  nineteenth  century  three 

international  conferences  were  held,  the  declared  object  of 

whose  promoters  was  to  secure  the  adoption 

International         Qf  bimetallism,  or  the  double  standard,  by  the 
Monetary  Con-  .  ...  _.t  i     i  i   •        1 

ferences.  nations  participating.     Iney  were  held  in  the 

years   1878,   1881,   and   1892 — the  first  and 

second  at  Paris,  the  third  at  Brussels.     The  first  and  the 

t^hird  were   called   at  the   instance   of  the   United   States  ; 


76  EVOLUTION  OF  MONEY 

the  second,  at  the  instance  of  the  United  States  and  France 
jointly.  All  of  them  failed  to  agree  upon  any  plan  to  ac- 
complish the  object  sought.  Notwithstanding  these  repeated 
failures,  President  McKinley,  in  1897,  appointed  a  commis- 
sion of  three  persons,  of  whom  Senator  Wolcott  of  Colorado 
was  the  chief,  to  visit  Europe  and  endeavor  to  promote  inter- 
national bimetallism  in  some  form.  The  commissioners  met 
with  some  encouragement  in  France.  They  then  went  to 
England  and  sought  to  secure  the  aid  of  the  Salisbury  min- 
istry, who  at  first  seemed  inclined  to  cooperate,  but  when 
facts  of  the  negotiation  became  generally  known,  the  busi- 
ness community  both  in  the  United  Kingdom  and  in  India 
protested  so  strongly  against  it  that  the  whole  project  was 
abandoned. 

The  first  essential  of  an  international  agreement  would  be 
to  express  in  figures  the  legal  ratio  between  the  two  metals, 
yet  none  of  the  conferences  ever  progressed  so  far  as  to  dis- 
cuss that  subject.  Any  considerable  deviation  of  the  agreed 
ratio  from  the  market  ratio  would  bring  powerful  counter- 
vailing forces  into  play.  If  gold,  for  example,  were  artificially 
cheapened,  less  gold  would  be  mined  and  greater  quantities 
would  be  used  in  the  arts,  while  the  contrary  effects  would 
be  felt  in  the  production  and  consumption  of  silver. 

The  great  obstacle  to  international  bimetallism  lies  in  the 
preference  of  mankind  for  gold  money  over  silver  money. 
If  this  preference  did  not  exist,  no  international  conference 
would  be  needed  in  order  to  put  silver  on  an 
B^rt'liiism.  ^^"^^  footing  with  gold.  Even  the  most  elab- 
orate system  of  exchanges  through  banks  and 
clearing  houses  leaves  a  residuum  of  payments  to  be  made 
by  the  transfer  of  metal,  and  here  the  question  of  weight 
becomes  decisive.  A  bank  which  has  to  receive  $1,000,- 
000  of  metal  will  always  prefer,  say,  4000  pounds  of  gold 
rather  than  140,000  pounds  of  silver.    It  can  afford  to  pay 


THE  GOLD  STANDARD  77 

a  premium  for  gold  equal  to  the  difference  in  the  cost  of 
handling  and  storing  the  two  masses.  The  earliest  sign  of 
a  premium  on  gold,  after  a  bimetallic  agreement  had  been 
made,  would  render  the  agreement  itself  inoperative. 

RECAPITULATION 

Inconveniences  resulting  from  the  use  of  two  metals  as 
standard  money  have  led  civilized  nations  successively  to 
demonetize  silver  and  to  adopt  the  single  standard  of  gold. 
These  inconveniences  were  manifested  for  the  most  part 
in  the  exportation  of  one  or  the  other  metal,  according  as 
the  market  ratio  varied  from  the  legal  ratio.  The  change 
to  the  single  gold  standard  has  come  about  within  the  past 
century,  and  mostly  during  the  past  thirty  years.  One 
reason  why  gold  has  been  preferred  to  silver  is  that  it  con- 
tains much  greater  value  than  silver  in  a  given  weight  and 
bulk,  being  thus  akin  to  a  labor-saving  machine. 

The  demonetization  of  silver  means  the  discontinuance 
of  the  coinage  of  silver  bullion  deposited  at  the  mint  by 
private  persons. 

In  some  countries  there  still  remain  large  amounts  of 
silver  in  circulation,  of  full  legal  tender,  such  as  the  thalers 
of  Germany,  the  five-franc  pieces  of  France,  and  the  rupees 
of  India.  These  pieces  are  usually  at  par  with  gold  at 
some  preexisting  ratio,  because  they  are  limited  in  amount 
and  are  received  as  the  equivalent  of  gold  by  the  govern- 
ments for  taxes.  The  banks  have  the  legal  right  to  tender 
these  silver  pieces  in  payment  of  checks,  and  in  France  and 
Germany  they  exercise  the  right  at  times,  in  order  (as  they 
say)  to  curtail  the  exportation  of  gold.  In  such  cases  there 
is  a  small  premium  on  gold  in  the  market. 


78  EVOLUTION  OF  MONEY 


Authorities 

Lord  Liverpool's  Coins  of  the  Reahn.   . 

Shaw's  History  of  Curreticy. 

Giffen's  Case  against  Bi7netallis?n. 

Carlile's  Evolution  of  Modern  Money. 

Papers  issued  by  the  Gold  Standard  Defence  Association. 
London,   1898. 

Report  and  accompanying  documents  of  the  United  States 
Monetary  Commission  of  1876. 

Report  from  the  Select  Committee  on  the  Depreciation  of 
Silver.     London,  1876. 

Report  of  the  Royal  Commission  on  Recent  Changes  in  the 
Relative  Value  of  the  Precious  Metals.     London,  1888. 

Report  of  the  International  Monetary  Conference  held  in  Paris 
in  August,  1878.     Washington,  1879. 

Proceedings  of  the  International  Monetary  Conference  held  in 
Paris  in  April,  May,  June,  and  July,  1881.    Cincinnati,  1881. 

Report  of  the  International  Monetary  Conference  held  at 
Brussels  in  1892.     London,  1893. 


BOOK   II 

GOVERNMENT  PAPER   MONEY 

CHAPTER   I 
COLONIAL   BILLS   OF   CREDIT 

Government  paper  money  is  usually  a  promise  to  pay 
coined  money.  Such  paper  is  of  several  different  kinds. 
We  shall  here  consider  chiefly  the  kind  which  does  not 
bear  interest,  which  is  payable  at  no  fixed  time,  and  which 
is  made  legal  tender  between  individuals. 

The  first  government  paper  to  circulate  as  money  in  this 
country  was  issued  by  the  Colony  of  Massachusetts  in  1690, 
in  order  to  pay  soldiers  who  had  returned  from  an  unsuc- 
cessful expedition  against  Canada.  The  public  treasury 
was  empty,  and  the  soldiers  could  not  or  would  not  wait 
for  the  collection  of  taxes  to  meet  their  demands.  The 
General  Court  accordingly  issued  ^40,000  in 
J"^^'  ,^.  ^  bills  of  credit  which  were  made  receivable  for 

taxes  and  exchangeable  for  any  commodities 
in  the  treasury.  These  were  issued  to  the  soldiers  in  antici- 
pation of  the  tax  collections ;  they  were  not  payable  at  any 
particular  time ;  they  did  not  bear  interest,  and  they  were 
not  legal  tender.  They  did  not  pass  for  more  than  twelve  or 
fourteen  shillings  in  the  pound.  The  soldiers  lost  two-fifths 
of  their  dues.  In  1692  the  bills  were  made  legal  tender  in 
all  payments  and  receivable  for  taxes  at  5  per  cent  better 
than  silver  and  redeemable  in  silver  at  the  end  of  twelve 
months.     These  provisions  made  them  equal  to  silver. 

79 


80  GOVERNMENT   PAPER   MONEY 

Yet  this  was  a  fatal  experiment.  Its  apparent  success  as 
a  means  of  postponing  taxes  led  to  disorders  far  worse  than 
the  commodity  currency  of  the  earlier  period.  It  spread  to 
the  other  colonies  like  an  epidemic.  Nearly  all  the  colonial 
governors  were  at  variance  with  their  legislatures  concern- 
ing bills  of  credit.     Acting  under  instructions  of  the  Lords 

of  Trade,  they  repeatedly  vetoed  the  paper- 
MolherTountr;.    "oney  bills.     Then  the  legislatures  refused 

to  provide  for  the  support  of  the  local  govern- 
ments. They  stopped  the  salaries  of  the  governors  and 
allowed  the  public  buildings  and  barracks  to  go  to  decay. 
This  source  of  irritation  against  the  mother  country  has 
been  grossly  neglected  by  historians  in  general,  but  not 
by  Mr.  Felt,  the  historian  of  Massachusetts  currency,  who 
assigns  it  its  proper  place  among  the  causes  which  led  to 
the  separation. 

In  South  Carolina  in  17 19  the  people  deposed  the  Pro- 
prietors' governor,  because  he  would  not  assent  to  bills  of 
credit,  and  the  king  connived  at  this  act  of  insubordination 
in  order  to  get  the  province  under  his  own  authority.  At 
a  later  period  the  legislature  of  this  colony,  being  at  variance 
with  the  royal  governor  on  the  same  subject,  adjourned 
for  three  years,  making  no  provision  for  the  support  of  the 
government  meanwhile.  The  same  thing  happened  in  New 
Hampshire.     Her  representatives  for  five  years  preceding 

the    year    1736    refused    all    supplies.     New 

And  with  the       Jersey  did  the  same  for  four  years,  for  the 
Colonial  Gov-  ^  ^,  i    •      j   ^ 

emors.  same  reason.     The  governors  complained  to 

the  home  authorities  ;  and  the  latter  insisted 

that  the  colonies  should  provide  a  permanent  instead  of 

an   annual  support  for  the   local  governments,  which  the 

colonies  refused  to  do  because  they  were  not  allowed  a  free 

hand  in  issuing  bills  of  credit.     In  almost  every  case  the 

governors  were  at  last  worn  out  and  compelled  to  yield. 


COLONIAL  BILLS    OF  CREDIT  8 1 

As  Mr.  Felt  says,  "  The  Briareus  of  paper  money  was  too 
strong  for  them." 

Petitions  against  bills  of  credit,  from  the  mercantile 
classes  in  the  colonies,  and  from  London  merchants  at 
last  prevailed  on  Parliament  to  take  action.  In  175 1  a 
bill  was  brought  forward  to  prohibit  paper 
^ruament'^^  money  in  the  four  New  England  provinces 
where  the  trouble  was  greatest,  but  before 
it  was  passed  the  agents  of  the  colonies  managed  to  get 
exceptions  in  case  of  great  emergencies  and  of  war.  Even 
in  these  cases  the  bills  were  not  to  be  legal  tender  between 
individuals.  In  1763  Parliament  passed  another  act  much 
more  stringent,  and  applicable  to  all  the  colonies. 

A  pamphlet  of  1743^  speaks  of  the  bills  of  credit  in  New 
England  issued  on  loan 

to  themselves,  Members  of  the  Legislature,  and  to  other  Bor- 
rowers, their  Friends,  at  easy  and  fallacious  Lays,  to  be  repaid  at 
very  long  Periods  ;  and  by  their  provincial  Laws  made  a  Tender 
in  all  Contracts,  Trade  and  Business,  whereby  Currencies,  various 
and  illegal,  have  been  introduced  which  from  their  continued 
and  depreciated  nature  in  the  Course  of  many  Years  have  much 
oppressed  Widows  and  Orphans  and  all  other  Creditors. 

This  writer  gives  special  attention  to  the  colony  of  Rhode 
Island,  which  had 

defrauded  more  in  a  few  years  than  any  the  most  wicked  admin- 
istrations in  the  several  nations  of  Europe  have  done  in  several 
centuries.     A   contract   made   30   years    ago   for 

Rhode  Island  an  ^j^^  sterling  in  value  (that  is,  silver  at  8s.  per 
Awful  Example.    -«j  i'  v  '  ^ 

oz.)  is  at  present  reduced  to  a  nominal  32J.  per 

oz.  .  .  .     This  expedient  of  depreciating  their  Government  bills, 

by  their  Laws  made  a  Tender  and  Currency,  is  promoted  by  the 

1  Quoted  in  "  A  Letter  from  a  Gentleman  in  Boston  to  his  Friend  in 
Connecticut."    In  the  New  York  Public  Library. 


82  GOVERNMENT   PAPER   MONEY 

fraudulent  Debtors  and  desperate  part  of  the  Colony  in  order  to 
pay  former  contracts  with  a  much  less  value  than  was  contracted 
for,  and  more  especially  to  defraud  British  merchants  in  their  out- 
standing'debts.  The  paper-money  promoters  are  the  desperate 
and  fraudulent,  these  being  vastly  the  Majority  in  the  colony, 
carrying  all  elections  ;  both  legislative  and  executive  parts  of 
their  government  are  annually  elective.  Thus  Government  is 
perverted  and  become  worse  than  a  State  of  Nature.  If  by 
chance  any  of  the  elected  opposes  the  emission  of  any  of  those 
fraudulent  bills  he  is  drop'd  next  election  as  a  professed  enemy  to 
the  Interest  of  the  Colony.  .  .  .  This  poor  small  colony,  from  a 
late  exact  Perlustration,  contains  not  exceeding  20,000  men, 
women  and  children,  whites,  Indians  and  negroes,  have  extant 
about  ;^4oo,ooo  paper  money.  And  of  this  about  three-quarters 
is  in  the  Possession  of  people  of  neighboring  Colonies. 

*'  All  our  paper-money-making  legislatures,"  says  the  con- 
temporary writer,  Dr.  Douglass,  "have  been  legislatures  of 
debtors,  the  representatives  of  people,  who  for  incogitancy, 
idleness,  and  profuseness  have  been  under  the  necessity  of 
mortgaging  their  lands."  To  the  same  purport  writes 
the  historian,   Hutchinson. 

Thomas  Paine  has  drawn  the  portrait  of  the  group. 
Writing  in  1786,  he  tells  us  how  the  speculators  and  debtors 
were  then  working  for  bills  of  credit.     He  says : 

There  are  a  set  of  men  who  go  about  making  purchases  upon 

credit,  and  buying  estates  that  they  have  not  wherewithal  to  pay 

for ;  and  having  done  this  their  next  step  is  to  fill 

Testimony  of         ^^^  newspapers  with  paragraphs  of  the  scarcity  of 
Thomas  Paine.  ^  ^  f       &     tr  ... 

money  and  the  necessity  of  a  paper  emission,  then 

to  have  legal  tender  under  the  pretense  of  supporting  its  credit, 

and  when  out,  to  depreciate  it  as  fast  as  they  can,  get  a  deal  of  it 

for  a  little  price  and  cheat  their  creditors ;  and  this  is  the  concise 

history  of  paper-money  schemes.^ 

1  Writings,  Vol.  II,  p.  178. 


COLONIAL   BILLS    OF   CREDIT  83 

Usurers  were   then,  as   now,  unpopular.     Any  means  of 

circumventing  them  was    hailed  with   satisfaction,  and    no 

method  was  more  obvious  than  that  of  furnishing  loans  at 

the   public  treasury  to  those  who  could  not 

Loans  from  the      borrow  elsewhere,  or  who  wanted  to  borrow 

Treasury.  ' 

at  less  than  the  market  rates,  or  who  wanted 
to  borrow  from  the  colony  at  low  rates  in  order  to  lend 
again  at  high  rates.  Anybody  who  had  influence  could  do 
this.  In  Rhode  Island  it  was  the  custom  of  the  favored 
ones  to  sell  their  privileges.  The  first  issue  of  bills  of 
credit  for  a  loan  was  in  South  Carolina  in  17 12.  From  this 
example,  says  Bancroft,  "  the  passion  for  borrowing  spread 
like  flame  on  a  dry  prairie." 

There  were  three  main  causes  or  excuses  for  the  issue  of 
bills  of  credit:  (i)  war  expenses;  (2)  loans  to  individuals; 
(3)  ordinary  expenses  of  government.  There  were  also 
other  minor  pretexts.  One  of  the  most  common  ways  of 
increasing  such  issues  was  the  alleged  replacement  of  old 
and   worn  bills,  which  often  meant  an  issue  so  large  as  to 

leave  a  margin  over  for  general  expenses,  and 
Biurof  Crei?  *°^  sometimes    a    very    large    margin.     Thus,   of 

;^46,ooo  Connecticut  bills  authorized  for  this 
purpose  between  17 13  and  1732,  ^29,885  went  to  the  pay- 
ment of  colony  debts.  In  this  case  the  General  Court  did 
not  wait  to  see  what  margin  would  be  left  after  replacing 
the  old  and  worn  bills,  but  dipped  into  the  reservoir  to  meet 
current  charges.  Similarly,  Maryland  once  issued  bills  of 
credit  as  a  sheer  gift  to  a  portion  of  the  inhabitants, — 
"the  taxables." 

Reports  were  made  from  time  to  time  to  the  home  govern- 
ment, in  response  to  inquiries  as  to  the  amount  of  bills 
outstanding.  Often  these  were  ingeniously  prepared  to 
convey  false  impressions.  To  avoid  discovery  the  New 
York  Assembly  repealed  all  safeguards  against  the  reissuing 


84  GOVERNMENT    PAPER   MONEY 

of   bills    of   credit   that   had    been    redeemed.     When   the 
governor  disallowed  the  act  the  treasurer  reissued  the  bills 

nevertheless.  The  governor  so  reported  to 
False  Reports. 

the  Lords  of  Trade,  and  added  that  the  treas- 
urer refused  to  let  him  know  the  amount  of  bills  outstanding 
when  requested  to  do  so. 

In  addition  to  legal-tender  acts,  there  was  a  great  variety 
of  laws  to  compel  people  to  sell  their  property  at  the  same 
price  for  bills  of  credit  as  for  silver.  The  "  debtor  class  " 
were    not    satisfied    with    forcing   depreciated    paper    upon 

creditors  for  past  obligations,  but  insisted 
Forcing  Laws. 

that  they  ought  to  be  able  to  buy  as  much 

property  with  the  paper  as  with  specie.      Those  who  had 

been  forced  to  take  the  paper  for  past  debts  naturally  joined 

in   this  demand,    and   the    legislatures    agreed  with  them. 

Hence  we  find  in  nearly  all  the  colonies  severe  penalties  on 

those  who  charged  more  for  their  goods,  lands,  or  services  in 

bills  of  credit  than  in  money.     In  some  cases  the  penalty 

was  a  fine,  in  others  imprisonment,  in  others  confiscation  of 

the  property  offered. 

The  usual  course  of  events  where  bills  of  credit  were 
issued  was  as  follows  :  (i)  emission  ;  (2)  disappearance  of 
specie  ;  (3)  counterfeiting;  (4)  wearing  out 
IToTcZ^.  °f  bills;  (5)  calling  in  and  replacing  worn 
and  counterfeited  issues  with  new  ones  ;  (6) 
extending  the  time  for  old  ones  to  run,  especially  those 
which  had  been  placed  on  loan ;  (7)  depreciation ;  (8)  repudi- 
ation of  early  issues  in  part  and  the  emission  of  others, 
called  "  new  tenor." 

Dr.  Douglass  says  that  Massachusetts  had  at  one  time 
"  old  tenor,  middle  tenor,  new  tenor  first,  new  tenor  second." 
Rhode  Island  had  an  indefinite  number  of  tenors. 

In  all  cases,  except  where  the  bills  were  placed  on  loan, 
taxes  were  laid  to  sink  them  at  some  time,  near  or  remote. 


COLONIAL  BILLS    OF  CREDIT.  85 

This  was  necessary  to  give  them  any  credit  at  all,  but  it 
was  very  easy  to  extend  the  time.  Consequently  postpone- 
ments were  frequent.  When  Parliament  took 
for  RedimpS,r  ^°^^  ^^  ^^^  Subject,  it  prohibited  all  extensions 
and  deprived  the  bills  of  their  legal-tender 
character  after  the  allotted  time  had  expired.  This  was 
regarded  as  a  great  grievance.  The  New  York  Legislature 
even  resolved  that  bills  not  tenderable  were  useless. 

Counterfeiting  and  wearing  out  were  invariable  and  very 
trying  evils.  The  former  was  punishable  with  death  in  all 
the  colonies  except  one  or  two, —  Bronson  says  in  all  except 
Connecticut,  —  but,  although  there  were  many  convictions, 
the  extreme  penalty  was  hardly  ever  enforced.  The  expul- 
sion   of   specie  which  followed   after  the  first  emission  of 

bills  of  credit  usually  left  the  people  without 
Counterfeiting. 

small  change.     Then  the  practice  of  halving 

and  quartering  the  bills  came  into  vogue,  and  this  opened 
a  new  door  to  fraud.  The  counterfeiters  halved  and 
quartered  their  own  bills  and  united  the  parts  to  the  corre- 
sponding parts  of  genuine  ones  and  sometimes  attached  the 
half  of  a  five-pound  note  to  the  half  of  a  ten.  There  was, 
indeed,  no  end  to  their  tricks.  Some  bills  of  small  denomi- 
nations circulated  after  they  were  known  to  be  counterfeit, 
because  there  was  no  other  small  change. 

Worn-out  bills  likewise  were  an  ever-recurring  nuisance. 
All  sorts  of  opprobrious  epithets  were  heaped  upon  them. 
They  were  called,  in  various  statutes,  old,  worn,  torn,  tat- 
tered, shattered,  ragged,  mutilated,  defaced,  obliterated, 
illegible,  and  "unfit   to  pass." 

The  depreciation  of  the  colonial  bills  varied  in  the  differ- 
ent colonies.  In  Massachusetts  the  maximum  depreciation 
was  II  for  I  (the  standard  being  "proclamation  money"). 
In  Connecticut  it  was  8  for  i.  In  1763  the  value  of  the  New 
Hampshire  shilling  was  a  little  less  than  a  half-penny;   in 


S6  GOVERNMENT    PAPER   MONEY 

1 77 1  it  vanished  altogether.     Rhode  Island  old-tenor  bills 

in  1770  were  worth  26  for  i.     Those  of  North  Carolina  were 

10  for   I  ;    of  South  Carolina,  7  for  i.     The 
Depreciation,  ,  -n        r     1  -in  ,       • 

bills  of  the  middle  colonies  were  kept  within 

reasonable  bounds, — a  result  due  mainly  to  the  stubborn- 
ness of  their  governors  in  resisting  the  legislatures  and 
keeping  the  issues  of  bills  within  limits.  The  maximum 
depreciation  in  New  York  was  only  25  per  cent,  in  com- 
parison with  proclamation  money. 

The  pamphlets  and  records  of  the  colonial  period  are 
filled  with  accounts  of  the  distress  and  demoralization  caused 
by  depreciated  paper  made  legal  tender.  As  all  loans  were 
so  payable,  the  accumulations  of  age  and  the  inheritances 

of  orphans  dwindled.      So,  too,  did  the  earn- 
Swindling.  .  .     ,  .  ^  , 

ings  of  the  wage-worker.     In  order  to  avoid 

the  losses  from  a  depreciating  standard  of  value,  resort  was 
had  by  workingmen  to  "  store  pay,"  and  here  they  were  gen- 
erally cheated.  Trustees  and  executors  who  had  money  in 
their  hands  which  belonged  to  other  people,  and  who  saw 
how  things  were  going,  often  postponed  payment  on  frivo- 
lous pretexts,  since  each  delay  enabled  them  to  settle  their 
accounts  with  less  value,  thus  "  devouring  widows'  houses." 

Not  only  was   bad  blood   stirred   up  by   the 
Mob  Law.  .  -^        ^     ,  ,  ,  .   . 

resistance  of  the  royal  governors,  but  a  spirit 

of  lawlessness  was  engendered  against  the  local  assemblies 

if  they  showed  a  disposition  to  resist  the  demands  of  the 

greenbackers  of  that  day.     Even  after  the  Revolution  the 

Legislature    of   New    Hampshire   was    mobbed  because  it 

refused  to  issue  legal-tender  bills.     One  of  the  demands  of 

Shays'  rebellion  in  Massachusetts  was  for  more  paper  money. 

In  Rhode  Island  after  the  Revolution  a  general 

Repudiation.  .  ...  r     ^   ^  .  i  i-  1 

system  of  repudiation  of  debts,   public  and 

private,  was  undertaken  and  carried  through  by  means  of 

legal-tender  paper,  in  spite  of  the  decisions  of  her  courts. 


COLONIAL  BILLS   OF   CREDIT  8/ 

Now  it  may  be  asked  what  happened  when  colonial  bills 
of  credit  were  issued  as  loans  to  private  individuals.  What 
the  borrowers  wanted  was  circulating  capital.  They  bor- 
rowed the  bills  in  order  to  spend  them  for 
of'theTolnBiUs.  ^^^^^  goods,  provisions,  building  materials, 
labor,  etc.  The  wages  they  paid  to  laborers 
were  expended  for  store  goods,  provisions,  etc. ;  so  we  may 
say  that  the  borrowers  of  the  bills  of  credit  aimed  to  get 
control  of  the  useful  things  that  were  on  sale  in  the  com- 
munity, and  that  they  succeeded  in  doing  so.  Now,  whether 
the  bills  depreciated  or  not,  it  is  evident  that  the  borrowers 
got  an  advantage  over  their  neighbors,  because  they 
obtained  control  of  this  circulating  capital  at  lower  rates 
than  others  had  to  pay.  This  was  precisely  the  reason 
why  they  wanted  the  loan  bills  to  be  issued.  If  they  could 
have  borrowed  at  the  same  rate  in  the  open  market,  there 
would  have  been  no  reason  for  borrowing  from  the  gov- 
ernment. But  the  injustice  did  not  stop  there.  What- 
ever they  took  out  of  the  loan  market  in  this  way  caused  a 
scarcity,  and  a  rise  of  the  rate  of  interest,  for  other  bor- 
rowers. One  of  the  most  observing  pamphleteers  of  the 
day  tells  us  that  the  rate  of  interest  on  "natural  loans" 
always  advanced  after  a  public  loan.  This  was  due  in  part 
to  the  withdrawal  of  loanable  capital,  and  in  part  to  the  fear 
of  lenders  that  the  bills  would  depreciate  in  consequence 
of  the  new  emission.  Most  commonly  they  did  depreciate. 
The  borrowers  were  for  the  most  part  land- 
Landownws^  °  owners.  Only  two  kinds  of  security  were 
allowed  by  law,  land  and  bullion.  Very  little 
bullion  was  ever  offered  at  the  loan  offices.  The  land- 
owners controlled  the  legislative  assemblies  everywhere. 
Thus  the  emission  of  bills  of  credit  on  loan  was,  in  effect, 
a  conspiracy  of  needy  landowners  against  the  rest  of  the 
community. 


88  GOVERNMENT   PAPER   MONEY 

RECAPITULATION 

Most  frequently  the  issue  of  legal-tender  notes  has  its 
beginning  in  an  emergency  of  war,  when  the  government 
finds  itself  unable  to  meet  its  obligations  with  money,  or 
hopes  to  escape  paying  the  rate  of  interest  demanded  for 
loans. 

Such  paper  is  usually  put  in  circulation  by  the  govern- 
ment paying  it  to  its  creditors  as  the  equivalent  of  specie, 
and  authorizing  them  to  pay  it  to  their  creditors,  and  so  on. 

Such  were  the  conditions  under  which  colonial  bills  of 
credit  were  first  issued  in  this  country.  Afterwards  the 
practice  of  issuing  them  for  the  ordinary  expenses  of  govern- 
ment was  adopted,  and  still  later  the  colonies  issued  such 
bills  as  loans  to  private  individuals. 

In  all  cases  the  bills  depreciated  more  or  less.  In  some 
instances  their  value  fell  to  zero  and  they  were  repudiated 
in  whole  or  in  part.  In  others  the  depreciated  bills  were 
followed  by  fresh  issues  called  "  new  tenor,"  which  depre- 
ciated in  like  manner,  and  were  succeeded  by  third  and 
fourth  "  tenors,"  which  took  the  same  downward  course. 

This  teaches  us  that  a  popular  government,  when  once 
started  after  the  igfiis  fatiius  of  irredeemable  paper,  cannot 
readily  stop  itself. 

The  effect  of  a  depreciating  currency  is  similar  to  that  of 
clipped  coin.  If  all  the  money  in  the  country  were  metallic, 
if  each  man,  upon  receiving  a  piece,  should  be  privileged 
to  shave  off  one  per  cent  before  passing  it,  and  if  the  law 
required  everybody  to  accept  the  remainder  at  its  face  value, 
the  consequences  would  be  like  those  which  followed  the 
emission  of  colonial  bills  of  credit.  In  the  course  of  time 
the  whole  coinage  would  be  reduced  to  a  fraction  of  its 
original  weight.  If  the  rulers  of  the  people  should  then 
decree  that  the  pieces  should  pass  only  for  their  metallic 


COLONIAL  BILLS   OF   CREDIT  89 

value,  and  that  new  coins  should  be  struck  at  the  mint  of 
full  weight,  but  that  clipping  might  go  on  as  before,  we 
should  have  old  tenor  and  new  tenor  just  as  they  had  in 
New  England  in  the  eighteenth  century. 

There  is  one  difference,  however,  in  favor  of  clipped  coin. 
Nobody  loses  anything  by  merely  holding  it.  Nobody  can 
shave  off  any  part  of  it  except  the  owner.  In  the  case  of 
a  depreciating  currency,  the  longer  one  keeps  it  the  more 
he  loses. 

The  colonial  bills  of  credit  were  always  made  receivable 
for  taxes.  Generally  the  laws  provided  that  they  should  be 
sunk  by  taxes  within  a  specified  time,  meaning  that  they 
should  all  be  taken  in  by  taxation  or  redeemed  with  the 
proceeds  thereof,  within  the  specified  time,  and  then  be 
canceled.  If  these  provisions  and  promises  had  been 
adhered  to,  the  disorders  in  the  currency  would  have  been 
much  less  serious  than  they  were,  but  the  importunity  of 
debtors  was  always  influential  with  the  legislative  assem- 
blies. In  order  to  postpone  payment  of  their  debts  to  the 
government  they  persuaded  the  government  to  postpone 
payment  of  its  debts  to  the  bill-holders  by  extending  the 
time  for  redemption  and  even  adding  new  bills  before  the 
old  ones  had  been  retired. 

If  no  more  bills  had  been  issued  than  could  be  sunk  by 
taxes  within  one  year,  and  if  the  law  to  this  effect  had 
been  rigidly  enforced,  the  evil  consequences  would  have 
been  slight. 

Authorities 

William  Douglass'  Discourse  concerning  the  Currencies  of  the 
British  Plantations  in  America.  (Republished  by  the  American 
Economic  Association,  1897.) 

Palfrey's  History  of  New  England. 

Felt's  Historical  Account  of  Massachusetts  Currency. 


90  GOVERNMENT    PAPER    MONEY 

Hutchinson's  History  of  Massachusetts,  1628  to  1774. 

C.  H.  J.  Douglas'  Financial  History  of  Massachusetts,  includ 
ing  catalogue  of  colonial  pamphlets  on  currency  and  banking. 
(Columbia  College  series,  1892.) 

Bronson's  Historical  Account  of  Connecticut  Currency. 

Arnold's  History  of  the  State  of  Rhode  Island  and  Providence 
Plantations. 

Belknap's  History  of  New  Hampshire. 

PhilUps'  Historical  Sketches  of  American  Paper  Currency. 

Ramsay's  History  of  South  Carolina. 

Hickcox's  History  of  Bills  of  Credit  issued  by  New  York  f-om 
jyog  to  lySg. 

Documents  relating  to  the  Colonial  History  of  New  York. 

Parker's  Taxes  and  Money  in  New  fersey  before  the  Revolution. 

Bullock's  Essays  on  the  Monetary  History  of  the  United  States 
(1900). 

A.  McFarland  Davis'  Currency  and  Banking  in  the  Province 
of  Massachusetts  Bay  (American  Economic  Association,  1900). 


CHAPTER   II 
REVOLUTIONARY  BILLS   OF  CREDIT 

Bad  as  the  colonial  bills  of  credit  were,  those  of  the  Revo- 
lutionary period  were  worse.  Our  ancestors  went  to  war 
without  any  preparation.  They  had  no  money.  They  had 
no  system  of  taxation.  They  had  no  central  authority 
capable  of  enacting  and  enforcing  one,  and  —  what  was  even 
worse  —  they  objected  to  being  taxed  either  by  Great  Britain 
or  by  their  own  local  governments.  All  the  separate  colo- 
nies began  to  issue  bills  of  credit,  even  before  the  Continental 
Congress  assembled. 

Nevertheless,  the  experience  of  the  past  had  not  been 
wholly  forgotten.  Even  Franklin,  who  had  been  an  advo- 
cate of  government  paper  in  earlier  times,  now  recoiled. 
When  the  first  paper  money  was  proposed  in  the  Conti- 
nental Congress  (June,   1775)  ^^  urged  that 

^ankiin's  ^j^^  ^^jj^  should  bear  interest,  in  order  to  pre- 

Warning.  '  ^ 

vent  depreciation.      When   the   second  issue 

was  proposed,    he   urged  that  Congress  should  borrow  on 

interest  the  bills  already  authorized.     Both  of  these  plans 

were    rejected.      The    third    issue   bore    interest,   and    now 

Franklin  urged  that  the  interest  should  be  payable  in  "hard 

dollars."     This  was  voted  to  be  impracticable. 

There  was  much  confusion  of  ideas  concerning  details. 

While  taking  time  to  consider  them,  it  was  voted  in  July, 

1 771:,  to  issue  due  bills  for  two  milHon  Span- 
First  Issues.  ./.„,,„  ,  ,    ,  .     r 

ish  milled  dollars,  to  be  sunk  by  taxes  m  four 

successive  years,  beginning  November  30,   1779,  the  taxes 

91 


92  GOVERNMENT    PAPER    MONEY 

to  be  levied  and  collected  by  the  states  in  proportion  to 
their  population.  The  bills  were  not  legal  tender.  The 
Congress  had  no  power  to  make  them  legal  tender,  but  in 
January,  1777,  it  recommended  that  the  states  should  do  so  ; 
and  this  they  did,  one  after  another,  in  one  way  or  another. 
Before  the  two  millions  were  issued,  another  million  was 
wanted  and  was  authorized,  together  with  three  millions 
more  before  the  end  of  the  year.  Nine  millions  more,  or 
fifteen  in  all,  were  out  before  independence  was  declared. 
This  was  called  "  continental "  currency,  to  distinguish  it 
frpm  the  issues  of  the  separate~stateS'. 

From  this  time  the  demon  of  "fiat  money"  had  posses- 
sionof  the  country  and  worked  its  will  on  the  inhabitants. 

e    issues    ran    on,    in    an    increasing    volume,    till    they 

amounted  to  two  hundred  and  forty-two  million  dollars  in 

the  year  1779.     In  1781  the  whole  mass  became  worthless. 

On  this  subject  the  essays  of  Pelatiah  Web- 
Pelatiah  Webster.  . 

ster  have  become  classic.     Mr.  Webster  was 

a  merchant  of  Philadelphia  and  an  ardent  patriot.  He 
wrote  while  the  paper-money  experiment  was  going  on. 
We  can  readily  believe  him  when  he  says  :  "  We  have 
suffered  more  from  this  than  from  every  other  cause  of 
calamity  ;  it  has  killed  more  men,  pervaded  and  corrupted 
the  choicest  interests  of  our  country  more,  and  done 
more  injustice  than  even  the  arms  and  artifices  of  our 
enemies." 

In  his  first  essay  (October  5,  1776)  Mr.  Webster  says 

that  he    cannot   discern    any  depreciation    as  yet,  or  any 

advance  in  the  prices  of  goods  beyond  what  a  state  of  war 

would  occasion,  even  if  the  currency  consisted 

Early  Deprecia-     ^^  ^^j^  ^^^  g-^^^j.  exclusively.     On  the  other 

hand,  Professor  Sumner  has  collected  evidence 
showing  that  at  some  places  goods  were  sold  at  lower  prices 
for  silver  than  for  bills,  even  before  the  Declaration  was 


REVOLUTIONARY   BILLS    OF   CREDIT  93 

signed.^  It  is  certain  that  committees  were  at  work  early 
in  1776  attending  to  the  cases  of  persons  who  discriminated 
against  paper  money.  The  most  common  punishment  for 
this  offense  was  seizing  some  portion  of  the  offender's  goods 
and  declaring  him  an  enemy  of  his  country.  That  this  was 
no  trifling  penalty  is  attested  by  the  fact  that  nearly  every 
one  recanted  and  promised  amendment.  Nevertheless  the 
number  of  offenders  increased  continually.  In  Philadel- 
phia, in  the  latter  part  of  1776,  one  of  the  penalties  was  the 
closing  of  the  shops  of  the  guilty  parties.  This  caused 
prices  to  rise  by  giving  a  monopoly  to  the  others ;  and  so, 
when  this  effect  was  observed,  the  first  culprits  were  allowed 
to  reopen. 

Early  in  1777  the  depreciation  had  become  too  great  to 
be  ignored.  Committees  were  appointed  in  nearly  all  the 
states  to  prevent  engrossing  and  forestalling.^  One  way  to 
do  this  was  to  buy  all  the  goods  of  a  particular  kind  in  sight 
for  the  army  and  to  require  the  owners  to  accept  continental 
money  for  it.  This  involved  the  necessity  of  deciding  how 
much  the  owners  were  entitled  to  retain  for  their  own  use 
or  to  meet  engagements  previously  made.  It  was  necessary 
also  to  fix  the  rate  of  wages  of  labor  for  reproducing  the 
goods.  At  a  later  period  the  depreciation  was  so  rapid  that 
Professor  Sumner  says  a  man  might  lose  his  whole  wages 
while  earning  them. 

Price  conventions  were  the  next  resort.  The  first  one, 
held  at  Providence,  was  composed  of  delegates  from  the 
four   New    England   states.      It  fixed  the   prices   at  which 

1  There  are  several  histoiies  of  the  continental  currency.  That  of 
Professor  Sumner,  in  his  Financier  and  Finances~of  the  American  Revo- 
iittion,As  much  the  best.  Mr.  A.  S.  Bolles,  in  his  Financial  History  of 
the  United  States,  has  Been  an  industrious  collector  of  facts. 

2  Forestalling  is  buying  goods  before  they  reach  the  market,  in  order 
to  sell  them  at  a  higher  price.     Engrossing  is  the  same  as  monopolizing. 


94  GOVERNMENT    PAPER   MONEY 

imported  goods  might  be  sold,  but  an  exception  was  made 
of  arms  and  ammunition  in  order  to   encourage  their  im- 
portation.    Retailers  were  not  to  charge  more 

Price  conven-        ^-j^^n  2  0  per  cent  advance.     The  regulation  of 

tion  in  New  .  . 

England.  prices  of   domestic  products   was  left  to  the 

states,  as  was  also  the  penalty  for  over-charg- 
ing. Rhode  Island  enacted,  in  addition  to  other  penalties, 
that  if  anybody  withheld  from  sale  any  goods  required  for 
the  army  or  navy,  the  state  officers  might  seize  them  and, 
if  necessary,  break  open  buildings.  A  little  later  it  was 
enacted  that  buildings  containing  any  goods  needed  by  the 
community  and  withheld  by  the  owners  might  be  broken 
open  and  the  contents  sold  at  the  statutory  prices.  An 
exception  was  made  of  salt,  as  being,  like  arms  and  ammu- 
nition, an  indispensable  article.     The  effect  of  these  laws 

was  to  discourage  importation.  Nobody  would 
^^Jsia.Ty  legal-      ^^^ing  in  goods  to  be  exposed  to  legal  pillage. 

Accordingly  the  Rhode  Island  laws  against 
engrossing  were  repealed  after  a  few  months.  The  course 
of  proceedings  in  Connecticut  was  substantially  the  same. 
This  state,  however,  had  a  law  to  prohibit  persons  from  buy- 
ing any  more  goods  than  the  selectmen  should  judge  to  be 
necessary  for  the  use  of  their  respective  families.  Anything 
like  prudence  in  laying  in  supplies  was  thus  forbidden. 

A  price  convention  of  the  six  Middle  States  was  held  at 
York,  Pa.,  in  March,  1777,  but  was  unable  to  agree  upon  a 

single  point.     Three  states  voted  that  maxi- 

Price  Convention   mum   prices   should   be   fixed,   that   sales   by 
of  the  Middle  .  ^       ,  ,   ,       .     ,  .  ,  ,  ,    ,         . 

States.  auction  should  be  forbidden,  and  that  impor- 

tation (which  had  fallen  off,  in  consequence 
of  the  disorderly  proceedings  of  committees)  should  be 
encouraged  by  bounties.  Three  voted  against  these  propo- 
sitions, believing  that  they  would  only  aggravate  the  evils. 
The  subject  was  accordingly  referred  back  to  the  states, 


REVOLUTIONARY   BILLS    OF   CREDIT  95 

but  the  execution  of  the  price-limiting  laws  was  oftener 
carried  out  by  mobs  than  by  the  constituted  authorities.  In 
Albany  two  persons  who  had  sold  rum  for  more  than  the 
established  price  were  taken  to  the  market  place  and  put 
on  a  scaffold,  when  they  fell  on  their  knees,  acknowledged 
themselves  guilty,  and  promised  to  observe  the  law  and  help 
to  enforce  it  upon  others.  Every  method  of  evasion,  such 
as  trade  by  barter,  subjected  persons  to  suspicion.  Thus, 
Richard  Henry  Lee,  who  commuted  his  rents  to  payment  in 
produce,  was  denounced  as  a  Tory  and  left  out  of  Congress 
at  the  next  election. 

Mr.  Webster,  in  one  of  his  essays,  said  that  not  more 
than  one  man  in  ten  thousand  was  capable  of  understanding 
the  subject.  The  greatest  man  of  the  period  did  not  under- 
stand it ;  for  Washington  wrote  to  Reed,  the   president   of 

Pennsylvania,  December  12,  1778,  commend- 
First^vi^s'^        ing  his  zeal  "  in  bringing  those  murderers  of 

our  cause,  the  monopolizers,  forestallers,  and 
engrossers,  to  condign  punishment.  It  is  much  to  be 
lamented,"  he  continued,  "that  each  state,  long  ere  this, 
has  not  hunted  them  down  as  pests  to  society  and  the 
greatest  enemies  we  have  to  the  happiness  of  America.  I 
would  to  God  that  some  one  of  the  more  atrocious  in  each 
state  was  hung  in  gibbets  upon  a  gallows  five  times  as  high 
as  the  one  prepared  by  Haman."  Yet  he  had  written,  more 
than  a  year  earlier  (September  28,  1777),  to  John  Parke 
Custis,  directing  him  to  see  that  the  rent  of  certain  land 
and  slaves  should  be  so  arranged  that  the  payments  should 
have  a  value  relative  to  the  currency.  "  I  do  not  mean  by 
this,"  he  says,  "  that  I  am  unwilling  to  receive  the  paper 
money.  On  the  contrary,  I  shall  with  cheerfulness  receive 
payment  in  anything  that  has  currency  at  the  time  of  pay- 
ment, but  of  equal  value  then  to  the  intrinsic  worth  at  the 
time  of  fixing  the  rent."     Only  two  months  before  he  wrote 


g6  GOVERNMENT    PAPER    MONEY 

to  Reed  about  hanging  monopolizers,  forestallers,  and 
engrossers,  he  wrote  (October  lo,  1778)  to  Custis,  advis- 
ing him  not  to  accept  money  for  a  piece  of  land  he  was 
about  to  sell,  but  to  take  other  land  in  exchange  for  it, 
because  the  money  might  lose  its  value.  This  was  just  what 
the  monopolizers,  forestallers,  and  engrossers  apprehended. 

Washington  was  an  honest  man.  It  never  occurred  to 
him  that  he  was  doing  with  his  land  and  slaves  exactly  what 
the  others  were  doing  with  their  provisions  and  store  goods. 
But,  a  year  later,  his  eyes  were  wide  open.  In  August,  1779, 
he  wrote  to  his  agent,  Lund  Washington,  that  he  would  no 
longer  accept  continental  money  on  contracts  made  before 
the  war,  unless  other  people  did  the  same, 
ch^nged!""*^^  "The  law,"  he  says,  "undoubtedly  was  well 
designed.  It  was  intended  to  stamp  a  value 
upon,  and  to  give  a  free  circulation  to  the  paper  bills  of 
credit,  but  it  never  was  nor  could  have  been  intended  to 
make  a  man  take  a  shilling  or  sixpence  in  the  pound  for  a 
just  debt,  which  the  debtor  is  well  able  to  pay,  and  thereby 
involve  himself  in  ruin." 

When  the  Father  of  his  Country  could  make  such  mistakes, 
we  need  not  wonder  that  the  common  people  were  befogged. 
Washington  here  says  that  it  was  merely  intended  by  Con- 
gress to  "  stamp  a  value  "  upon  certain  pieces  of  paper.  If 
value  can  be  stamped  upon  paper,  it  is  obviously  useless  to 
work  for  a  living.  All  that  is  required  to  insure  plenty  and 
prosperity  is  to  pass  a  law,  and  then  set  a  few  printing 
presses  at  work.  If  Congress  attempts  to  stamp  a  value 
upon  a  thing  that  is  intrinsically  worthless  and  fails  in  the 
attempt,  its  intentions  may  form  a  subject  of  curious  interest, 
but  they  are  of  no  practical  importance. 

After  the  Revolution  and  to  the  end  of  his  life,  Washing- 
ton was  an  inflexible  opponent  of  bills  of  credit,  and  he  had 
need  to  use  all  his  influence  against  that  form  of  debauchery 
in  Virginia. 


REVOLUTIONARY   BILLS    OF   CREDIT  97 

With  the  mass  of  the  people  nothing  could  be  done.  All 
of  them,  the  wise  and  unwise  together,  were  hurrying  to  a 
cataclysm. 

The  fatal  error  (says  Pelatiah  Webster),  that  the  credit  and 

currency  of  the  continental  money  could  be  kept  up  and  supported 

by  acts  of  compulsion,  entered  so  deep  into  the 

The  Final  mind  of  Coneress  and  all  departments  of  adminis- 

Cataclysm.  .         ,  ,      ,  f  .  ,         . 

tration  through  the  states  that  no  considerations 

of  justice,  religion,  or  policy,  or  even  experience  of  its  utter  ineffi- 
ciency could  eradicate  it.  It  seemed  to  be  a  kind  of  obstinate 
delirium,  totally  deaf  to  every  argument  drawn  from  justice  and 
right,  from  its  natural  tendency  and  mischief,  from  common  sense 
and  even  common  safety.  This  ruinous  principle  was  continued 
in  practice  for  five  successive  years,  and  appeared  in  all  shapes 
and  forms,  i.e.^  in  tender  acts,  in  limitations  of  prices,  in  awful 
and  threatening  declarations,  in  penal  laws  with  dreadful  and 
ruinous  punishments,  and  in  every  other  way  that  could  be 
devised,  and  all  executed  with  a  relentless  severity,  by  the  high- 
est authorities  then  in  being,  viz.^  by  Congress,  by  assemblies 
and  conventions  of  the  states,  by  committees  of  inspection  (whose 
powers  in  those  days  were  nearly  sovereign),  and  even  by  military 
force ;  and  though  men  of  all  descriptions  stood  trembling  before 
this  monster  of  force,  without  daring  to  lift  a  hand  against  it, 
during  all  this  period,  yet  its  unrestrained  energy  ever  proved 
ineffectual  to  its  purposes,  but  in  every  instance  increased  the 
evils  it  was  designed  to  remedy,  and  destroyed  the  benefits  it  was 
intended  to  promote ;  at  best,  its  utmost  effect  was  like  that  of 
water  sprinkled  on  a  blacksmith's  forge,  which  indeed  deadens 
the  flame  for  a  moment,  but  never  fails  to  increase  the  heat  and 
force  of  the  internal  fire.  Many  thousand  families  of  full  and 
easy  fortune  were  ruined  by  these  fatal  measures,  and  lie  in  ruins 
to  this  day,  without  the  least  benefit  to  the  country,  or  to  the  great 
and  noble  cause  in  which  we  were  then  engaged. 

When  the  price  conventions  failed  of  their  object,  new 
ones  were  held  fixing  new  limits,  —  as,  for  example,  fourfold 


98  GOVERNMENT    PAPER    MONEY 

the  prices  of  1774,  then  eightfold,  then  tenfold,  then  twenty- 
fold,  —  terrorism  being  applied  in  each  case  to  enforce  the 
decrees.  Country  folks  accused  town  folks  of  extortion, 
and  threatened  to  come  in  and  take  what  they  wanted  by 
force.  Town  folks  accused  country  folks  of  withholding  their 
produce.  Laws  were  enacted  against  withholders.  Anony- 
mous handbills  and  broadsides  were  circulated,  threatening 

vengeance  on  merchants.     Turmoil  was  everv- 
Social  Terrorism.  .  •' 

where.      Society  was  like  a  train  of  Eskimo 

dogs  when  the  driver  hits  with  the  whip  the  leader,  which 

turns  and  falls  upon  the  dog  behind  him,  and  presently  the 

whole  pack  are  piled  together  in  battle,  not  one  knowing 

what  it  is  all  about.     As  a. result  of  such  irrational  business 

disturbances  Boston  was,  in  October,  1779,  on  the  verge  of 

starvation ;    money   transactions    had    nearly    ceased,    and 

business  was  done  by  barter. 

In    May,    1779,    two    regiments    of   Connecticut    troops 

revolted  on  account  of  their  bad  pay.      In  January,  1781, 

the  Pennsylvania  line  broke  into  mutiny  for 

Mutiny  of  Soldiers.  "^  .,.,11  .         ,  .     , 

the  same  reason  and  killed  a  captain  who  tried 

to  bring  them  to  submission.     A  soldier's  pay  had  dropped 

by  depreciation  from  $7.00  per  month  to  ^;^  cents,  although 

it  had  been  twice  raised  by  Congress.     Washington  could 

not  move  his  soldiers  to  Yorktown  till  Robert  Morris  had 

borrowed  hard  money  from  Rochambeau  for  their  back  pay. 

In   March,  1780,  Congress  tried  the  colonial  experiment 

of  "new  tenor"  in  a  very  awkward  and  roundabout  way, 

and   declared  old  tenor  to  be  worth  40    for  i,  the  actual 

depreciation  beins:  60  for  i.     As  it  was  sup- 
•*ITew  Tenor."  t     ,        ^  r  •  1 

posed  that  $200,000,000  or  continental  money 

was  now  out,  this  was  a  repudiation  of  all  but  $5,000,000  of 

it.      The    depreciation   then    went   on   more   rapidly   than 

before.     The  new-tenor  bills  started  at  a  depreciation  of  2 

for  I,  which  became  3  for  i  before  they  reached  the  army 


REVOLUTIONARY   BILLS   OF  CREDIT  99 

and  dropped  to  6  for  i  in  a  few  months.  Old  tenor  went  at 
a  galloping  pace  down  to  500  for  i  in  Philadelphia,  when  it 
ceased  to  circulate.  In  the  remoter  districts  of  the  South 
it  continued  in  circulation  nearly  a  year  longer,  and  until 
the  depreciation  had  reached  looo  for  i.  The  Southern 
people,  when  they  learned  that  they  had  been  using  the 
stuff  long  after  it  had  become  worthless  in  the  North,  thought 
that  they  had  been  cheated  by  the  Yankees,  thus  intensifying 
the  sectional  distrust  which  was  already  so  dangerous. 

Counterfeiters  had  been  at  work  all  the  time  and  with 
so  much  success  that  Congress  was  obliged  to  call  in  the 
entire  issues  of  certain  dates  and  declare  them 
uncurrent  after  a  fixed  period.  The  issues 
thus  branded  fell  25  per  cent  as  compared  with  those  not 
branded.  Still,  counterfeiting  only  hastened  the  impending 
crisis,  and  in  that  respect  it  was  a  public  advantage ;  for, 
as  soon  as  paper  money  was  dead,  hard  money  sprang  to 
life,  and  was  abundant  for  all  purposes.  Much  had  been 
hoarded  and  much  more  had  been  brought  in  by  the  French 
and  English  armies  and  navies. 

When  the  paper  had  become  clearly  unmanageable,  early 
in  1779,  Congress  bethought  itself  of  specific  supplies  as 
a  means  of  feeding  the  army.  Under  this  plan  requisitions 
were  made  upon  the  states  for  beef,  pork, 
pSeT  ^^^^'  flour,  corn,  forage,  etc.  Contrary  to  expecta- 
tion, this  was  found  to  be  the  worst  device  of 
all,  since  it  called  for  a  vast  new  system  of  transportation, 
warehousing,  and  accountability,  and  opened  the  door  to 
innumerable  frauds.  Robert  Morris,  the  Superintendent  of 
Finance,  protested  against  it  in  the  beginning  as  the  most 
wasteful  method  of  supplying  the  army,  but  his  protest  was 
unheeded.  Nothing  would  open  the  eyes  of  Congress  but 
an  experiment.  Instantly  there  was  a  tangle  of  the  public 
accounts  which  nobody  could  unravel.     In  some  cases  flour 


lOO  GOVERNMENT    PAPER   MONEY 

collected  for  the  army  was  not  forwarded  because  there  was 
no  money  to  pay  teamsters,  but  it  remained  at  the  place  of 
collection  till  it  was  spoiled.  Other  consignments  which 
were  actually  sent  arrived  too  early  or  too  late  and  were 
left  on  the  ground  exposed  to  the  weather.  Cattle  forwarded 
for  beef  were  allowed  to  wander  away.     Collections  were 

made  and  not  reported.  In  August,  1780, 
FaiiuTe*^^*^  Washington  was  obliged  to  send  word  to  a 

body  of  militia,  who  were  about  to  march  to 
his  aid,  not  to  come,  because  he  could  not  feed  them.  Com- 
municating this  fact  to  Congress,  he  said,  "The  present 
mode  of  obtaining  supplies  is  the  most  uncertain,  expen- 
sive, and  injurious  that  could  be  devised."  He  said  that 
it  had  made  impressment  necessary,  and  that  impressment 
could  not  last  long.  Many  of  General  Greene's  soldiers 
could  not  leave  their  tents  because  they  had  no  clothes.  This 
experiment  of  specific  supplies  was  an  attempt  to  carry  on 
government  without  any  medium  of  exchange.  It  was  a 
complete  failure. 

Impressment,  somewhat  disguised,  had  been  resorted  to 
from  the  time  when  continental  money  began  to  depreciate. 
To  seize  a  man's  goods  and  tender  him  irredeemable  paper, 

at  a  rate  which  would  not  enable  him  to 
Impressments. 

replace    the   goods,  was  confiscation  of   the 

difference  between  the  value  of  paper  and  that  of  specie. 
All  the  price  conventions  were,  in  fact,  impressment  con- 
ventions under  another  name.  Congress  recommended  the 
impressment  of  horses  and  wagons  "  at  a  reasonable  rate  " 
as  early  as  1775.  This  method  of  securing  supplies  was  not 
unknown  to  the  colonies.  New  York  had  resorted  to  it  in 
the  old  French  wars,  and  South  Carolina  in  her  Indian  wars. 
Lists  of  articles  impressed,  with  the  prices  attached,  are  of 
frequent  occurrence  in  colonial  statutes.  These,  however, 
implied  payment  in  full  measure,  not  long  deferred. 


REVOLUTIONARY   BILLS   OF  CREDIT  lOI 

When  the  continental  money  began  to  depreciate  rapidly, 
impressments  became  more  frequent.  In  Pennsylvania  so 
many  horses  and  wagons  were  impressed  that  the  country 
people  stopped  bringing  fuel  to  the  towns.  This  led  to  an 
exception,  by  the  Council  of  Safety,  of  teams  engaged  in 
hauling  v/ood  or  provisions.  In  Virginia  impressments  were 
so  numerous  that   the    people    sent   their  teams  over  the 

mountains  or  into  North  Carolina  for  safety. 
Also  a  Failuie.        _^  ,  ,  •  r  •  ,  ,  •  , 

Others  made  a  practice  of  removing  and  hid- 
ing a  wheel  or  some  other  indispensable  part  of  a  wagon,  so 
that  it  might  be  useless  when  the  impressing  officers  came. 
When  Washington  arrived  in  camp  at  Yorktown,  ample 
supplies  of  bacon  had  been  collected  and  stored  for  the 
army,  south  of  the  James  River,  but  they  could  not  be 
moved  because  the  impressing  officers  could  not  find  any 
teams  to  haul  them,  in  the  oldest  settled  part  of  America. 
Teamsters  who  had  been  impressed  threw  out  their  loads 
at  the  wrong  places.  Others  ran  away  with  them  and  did 
not  return.  Hamilton  wrote  to  Greene  that  public  credit 
was  so  totally  lost  that  nobody  would  furnish  aid,  even  in 
the  face  of  impending  ruin.  All  this  was  at  the  very  crisis 
of  the  war,  while  the  fleet  of  De  Grasse  was  sailing  into 
Chesapeake  Bay.  But  for  that  fortunate  conjuncture  the 
war  could  not  have  been  continued,  so  greatly  had  the 
people  been  alienated  by  bad  money  and  the  harsh  treat- 
ment which  it  led  to. 

In  May,  1781,  Congress  recommended  that  the  states 
should  repeal  their  legal-tender  laws.     Some  of  them  had 

already  done  so,  and  now  the  rest  followed 

Depreciation  "  ^^^^'  ^^^  °^  ^^^^  adopted  "scales  of  depre- 
ciation "  for  the  settlement  of  debts.  These 
were  tables  showing  how  much  the  money  was  worth  in 
specie  at  various  times  and  how  disputed  accounts  should 
be  settled.    The  tables  were  notoriously  incorrect.    The  one 


';ir>?  GOVERNMENT   PAPER   MONEY 

recommended  by  Congress  placed  the  currency  at  par  in 
September,  1777,  whereas  it  was  worth  at  that  time  only  ;^^ 
cents  on  the  dollar.  New  confusion  and  new  wrongs  were 
introduced  by  the  new  policy.  "  The  courts  could  not  do 
justice,"  says  Professor  Sumner,  "  because  depreciation 
introduced  a  fraud  into  the  very  essence  of  the  case,  and 
the  agent  of  the  fraud  was  almost  always  innocent,  so  far  as 
his  intention  was  concerned.  If,  therefore,  the  court  under- 
took to  release  the  victim  of  the  fraud  from  all  effect  of  the 
fraud,  the  injury  was  simply  thrown  back  on  the  perpetrator, 
who,  being  innocent,  suffered  as  much  wrong  as  the  victim 
would  have  suffered  if  nothing  had  been  done." 

Continental  money  was  now  an  object  of  execration  and 
afterwards  of  derision.     "  Not  worth  a  continental "  became 

a  synonym  for  absolute  worthlessness.  In 
Contfnl^taL-       ^^^  ^^t  of  Congress  approved  August  4,  1790, 

authority  was  granted  for  funding  the  bills  in 
6  per  cent  bonds  '^  at  the  rate  of  one  hundred  dollars  in 
the  said  bills  for  one  dollar  in  specie."  Only  $7,000,000 
turned  up  to  take  advantage  of  this  provision. 

When  the  final  catastrophe  came,  some  of  the  wise  men 
of  the  period  exclaimed  that  the  continental  money  was 
simply  a  form  of  taxation,  and  that  it  had  been  paid  and 

canceled.      Franklin    consoled    himself    with 

Continental  t^js   idea,  saying  that  the   bills  clothed   and 

Money  consid-  ^      o 

ered  as  a  Tax.       fed  the  army  and  that  they  operated  as  a  tax, 

bearing  most  heavily  on  the  rich,  as  was 
proper,  since  the  rich  had  the  most  money.  Strange  that 
so  great  a  man  could  have  been  so  deceived !  If  the  con- 
tinental money  was  a  tax,  it  did  not  bear  heaviest  upon  those 
who  had  the  most,  but  upon  those  who  kept  it  longest. 
Those  who  had  money  due  them  at  fixed  times  and  could 
not  hasten  the  payment  were  faxed,  not  in  proportion  to 
their  wealth,  but  in  proportion  to  the  time  the  debts  had  to 


REVOLUTIONARY   BILLS    OF   CREDIT  IO3 

run.  All  who  depended  upon  regular  interest  payments  — 
and  most  of  the  charitable  and  educational  institutions  of 
the  day  were  in  this  category — were  taxed  at  various  rates 
up  to  97^  per  cent  of  their  entire  income.  It  is  a  complete 
subversion  of  ideas  to  call  this  a  tax. 

The  word  "  tax  "  is  from  the  Latin  taxare,  to  value  or  to 
appraise.  It  presumes  a  methodical  arrangement  of  the 
taxable  persons  so  that  justice  shall  be  done  and  each  shall 
know  what  he  has  to  pay.  Taxation  is  the  opposite  of  con- 
fiscation. It  was  adopted  in  order  that  confiscation  might 
be  avoided.  Confiscation,  however,  has  the 
cat?o^n^°^*^"  n^erit  of  enabling  the  government  and  people 
to  know  how  much  has  been  taken,  and  from 
whom,  so  that  when  more  propitious  times  come,  or  a  higher 
sense  of  justice  prevails,  restitution  may  be  made.  The 
kind  of  confiscation  or  taxation  that  continental  money  pro- 
duced was  hurly-burly.  The  government  plundered  right 
and  left,  and,  instead  of  keeping  an  account  of  persons  and 
things,  it  told  the  victims  to  rob  the  next  ones  they  came  to. 

A  euphemism  which  still  lingers  is  that  "the  continental 
money  fell  gently  asleep  in  the  arms  of  its  last  possessor." 
A  truer  figure  of  speech  would  be  that  it  passed  out  of  the 
world  like  a  victim  of  delirium  tremens. 

It  may  be  asked  what  else  could  have  been  done.  If  the 
continental  money  was  a  disguised  tax,  certainly  an  undis- 
guised one  would  have  been  better.  What  the  government 
required  was  army  supplies.  These  were  partly  the  products 
of  the  country  and  partly  imported,  the  latter  being  paid 

for  with  the   products  of  the  country.     The 
The  Alternative.  ,      ,.  ,  .  ,     , 

people  did  not  avoid  the  necessity  of  parting 

with  their  products  by  the  device  of  issuing  paper  money. 

Except  what  was  borrowed  and  begged  abroad,  the  whole 

cost  of  the  war  was  paid  by  the  thirteen  states  out  of  their 

annual  produce.     Therefore  it  was   a  question  merely  of 


I04  GOVERNMENT   PAPER   MONEY 

how  the  contributions  should  be  levied.  Regular  taxation 
is  always  better  than  confiscation,  because  it  is  more  eco- 
nomical and  because  it  conserves  the  public  morals,  the 
confidence  of  the  citizens  in  their  own  government,  and 
the  respect  of  the  world. 

One  of  the  striking  phenomena  of  the  Revolution  was 

the  great  display  of  luxury.     Franklin  wrote  in  1779  :,  "The 

extravagant    luxury   of    our   country    in    the 

Display  of  midst  of  all  its  distresses  is  to  me  amazing." 

Luxury  during         ^         ,  .  ,,  ^  ,  ^ 

the  War.  Another  writer  says  :  "  Every  form  of  waste- 

fulness and  extravagance  prevailed  in  town 
and  country,  nowhere  more  than  in  Philadelphia  under  the 
very  eyes  of  Congress, —  luxury  of  dress,  luxury  of  equipage, 
luxury  of  the  table."  ^ 

This  is  not  hard  to  understand.  If  a  man  owed  $1000 
gold  value  and  was  enabled  to  pay  it  with  $100,  he  had 
$900  disposable  for  other  purposes.  As  this  money  had 
not  come  by  hard  labor,  he  would  naturally  be  somewhat 
free  in  spending  it.  He  would  give  good  dinners,  drive  fast 
horses,  and  buy  fine  clothes  and  jewelry  for  his  family.  It 
was  the  transfer  of  property  from  frugal  persons  to  spend- 
thrifts. While  it  continued,  it  gave  a  deceitful  appearance 
of  prosperity.  Like  conditions  prevailed  during  the  Civil 
War,  both  North  and  South. 

After  the  war  seven   states   (Rhode   Island,  New  York, 
New  Jersey,  Pennsylvania,  the  Carolinas,  and 
Post-Revoiu-         Georgia)  plunged  into  paper-money  debauch- 
ery afresh.     There  were  also  severe  struggles 
over  the  question  in  New  Hampshire,  Massachusetts,  Mary- 
land, and  Virginia.^ 

1  Greene's  Historical  View  of  the  American  Revolution. 

2  See  the  first  volume  of  McMasters'  History  of  the  People  of  the 
United  States^  where  these  movements  are  well  described. 


REVOLUTIONARY    BILLS   OF   CREDIT  IO5 

RECAPITULATION 

The  Revolutionary  bills  of  credit  were  of  the  same  gen- 
eral character  as  the  colonial  bills  which  preceded  them, 
except  that  they  were  issued  only  for  war  purposes. 

To  prevent  depreciation  it  was  deemed  necessary  to  fix 
the  prices  of  merchandise  by  law  and  to  punish  persons 
who  should  sell  at  higher  prices  for  paper  than  for  silver. 
Severe  punishments  were  inflicted  for  this  offense,  but  they 
did  not  stop  or  even  retard  the  depreciation. 

The  bills  eventually  became  worthless  and  were  repudiated. 

Many  of  the  most  patriotic  families  of  that  day  were  ruined 
by  the  use  of  these  bills,  without  any  benefit  to  the  public 
cause. 

Authorities 

Pelatiah  Webster's  Political  Essays. 

Sumner's  Financier  and  Finances  of  the  American  Revolution. 
Bronson's  Connecticut  Currency,  Continental  Money  and  the 
Finances  of  the  Revolution. 

Bolles'  Fina7tcial  History  of  the  United  States. 
Ramsay's  History  of  the  American  Revolution. 
Hildreth's  History  of  the  United  States. 
Bancroft's  History  of  the  United  States. 
McMasters'  History  of  the  People  of  the  United  States. 


CHAPTER   III 

THE   GREENBACKS 

During  the  War  of  1812  the  government  of  the  United 

States  issued  Treasury  notes  to  the  amount  of  $36,680,794. 

All  except  $3,392,994  were  payable  to  order  and  payable  at 

a  definite  time  and  bore  interest  at  the  rate  of  5f  per  cent. 

About  two-thirds  of  them  were  of  denomina- 

Treasury  Notes      tions  of  $100  or  more.     They  did  not  become 

before  the  Civil  .     ,  ...  .. 

-V7ar.  ^  P^^t  of  the  circulatmg  medium   and  were 

not  intended  to.  They  were  paid  to  such 
creditors  of  the  government  as  were  willing  to  receive  them, 
and  they  were  generally  at  par  until  specie  payments  were 
suspended  in  September,  18 14.  On  November  12,  18 14, 
Mr.  Hall,  a  member  of  Congress  from  Georgia,  introduced 
a  bill  in  the  House  for  an  issue  of  Treasury  notes  to  be 
legal  tender.  The  House,  by  a  vote  of  42  to  95,  and  with- 
out debate,  refused  to  consider  this  bill.  No  other  attempt 
was  made  to  pass  a  legal-tender  bill  until  1862. 

In  the  panic  and  crisis  of  1837-43,  during  a  portion  of 
which  time  specie  payments  were  suspended,  the  govern- 
ment issued  Treasury  notes  to  the  amount  of  $47,000,000 
to  meet  deficiencies  of  revenue.  All  of  these  notes  bore 
interest  and  were  payable  at  a  fixed  time.  They  did  not 
become  a  part  of  the  circulating  medium.  A  few  were 
issued  by  the  Secretary  of  the  Treasury  in  1842  bearing 
only  a  nominal  rate  of  interest  (one  mill  per  $100  per 
annum).  Such  notes  had  not  been  contemplated  by  Con- 
gress.   The  Committee  of  Ways  and  Means  of  the  House,  to 

106 


THE   GREENBACKS  lO/ 

whom  the  subject  was  referred,  reported  that  the  Secretary 
had  exceeded  his  authority,  but  Congress  took  no  action  on 
the  report.  It  was  the  opinion  of  the  Committee  that  these 
notes  were  "  bills  of  credit  "  within  the  meaning  of  the  Con- 
stitution and  that  Congress  had  no  power  to  issue  bills  of 
credit.  In  1847,  during  the  war  with  Mexico,  Treasury 
notes  to  the  amount  of  $26,122,100  were  issued.  They 
bore  interest  at  the  rate  of  5f  and  6  per  cent.  They  did 
not  enter  into  the  circulation  and  were  not  intended  to. 
The  foregoing  issues  of  interest-bearing  Treasury  notes 
were  merely  government  loans,  of  which  the  securities  were 
in  small  denominations  and  had  only  short  periods  to  run. 

When  specie  payments  were  suspended  in  18 14,  and 
again  in  1837,  silver  small  change  disappeared  because  it 
was  worth  more  per  dollar  than  the  bank  notes  in  circula- 
tion. On  both  occasions  private  notes  and  tickets  of  less 
denominations  than  $i.oo,  and  copper  coins,  were  issued 
and  put  in  circulation  by  bridge,  ferry,  and  turnpike  com- 
panies and  by  tradesmen  and  manufacturers.  One  hundred 
and  sixty-four  varieties  of  private  copper  coins  of  the  period 
of  1837  have  been  preserved  in  numismatic  collections. 
Most  of  them  bore  the  names  of  the  issuers,  who  promised 
to  redeem  them. 

Prior  to  the  Civil  War  the  fiscal  operations  of  the  gov- 
ernment were  transacted  exclusively  with  coin,  by  its  own 
officers,  without  the  intervention  of  banks.  In  August,  186 1, 
Mr.  Chase,  the  Secretary  of  the  Treasury,  negotiated  three 
loans  of   $50,000,000  each  from   the  banks  of  New  York, 

Boston,  and  Philadelphia.  In  anticipation  of 
War  Loans  of  1861 .         ,    ,  ^  ,      ,  ,       , 

such  loans.  Congress  had  passed  a  law  author- 
izing him  "  to  deposit  any  of  the  moneys  obtained  on  any  of 
the  loans  in  such  solvent  specie-paying  banks  as  he  might 
select,"  and  to  withdraw  the  same  as  required  for  the  pay- 
ment of  public  dues.     The  object  of  this  law  was  to  enable 


I08  GOVERNMENT   PAPER   MONEY 

him  to  leave  the  money  in  the  banks  as  a  deposit  till  wanted 
for  actual  disbursement,  and  then  to  withdraw  it  by  checks, 
which  would  be  settled  at  the  clearing  house.  This  was 
a  discretionary  power,  and  Mr.  Chase  decided  not  to  make 
use  of  it.  The  bankers  argued  that  the  financial  operations 
of  the  government  could  be  best  carried  on  by  leaving  their 
gold  in  their  own  vaults  as  the  basis  of  credit.  Against  the 
strong  opposition  of  the  banks,  he  required  them  to  pay 
their  gold  into  the  sub-treasury  at  New  York  at  the  rate  of 
about  $5,000,000  per  week. 

This  policy  does  not  appear  to  have  had  any  harmful 
effect,  except  that  of  exciting  the  fears  of  the  bankers  them- 
selves.^ The  public  creditors,  who  received  the  gold,  depos- 
ited it  again  in  banks,  where  it  became  the  property  of  the 
latter,  like  any  other  funds  or  securities  among  their  assets. 
The  largest  amount  of  gold  in  the  banks  of  the  three  cities 
at  any  time  during  the  year  was  $63,200,000,  August  17. 
On  December  7  following,  it  was  $58,100,000,  although  in 
the  meantime  they  had  loaned  the  government  $100,000,000 
and  had  agreed  to  loan  $50,000,000  more.  These  loans  had 
been  largely,  but  not  wholly,  reimbursed  to  the  banks  by  the 
sale  to  the  public  of  the  securities  they  received  from  the 
government. 

Everything  appeared  to  be  going  on  well,  but  early  in 
December, 

two  untoward  events  occurred.  The  first  was  the  report  of  the 
Secretary  of  the  Treasury.  It  had  been  generally  felt  that  the 
plan  of  borrowing  from  the  banks  to  carry  on  the  war  could  be 
only  a  temporary  makeshift  intended  to  serve  until  a  permanent 

1  In  the  first  edition  of  this  book  I  ascribed  the  suspension  of  specie 
payments  in  December,  i86i,to  the  removal  of  the  gold  from  the  banks 
by  Secretary  Chase.  An  article  on  this  subject  by  Mr.  Wesley  C. 
Mitchell,  in  the  Journal  of  Political  Economy ^  June,  1899,  has  convinced 
me  that  I  attached  too  much  importance  to  that  action. 


THE    GREENBACKS  IO9 

policy  could  be  matured.  It  was  hoped  that  the  finance  report  in 
December  would  present  a  programme  of  adequate  taxation.  The 
disappointment  over  its  failure  to  do  so  was  keen,  and  the  suspi- 
cion that  the  Secretary  was  not  equal  to  his  great  task  injured  the 
credit  of  the  government.  The  second  event  was  the  Trent  affair, 
which  threatened  for  a  time  to  involve  the  Federal  Government 
in  a  war  with  England. 

The  moral  effect  of  th^se  events  was  immediately  seen.  The 
credit  of  the  government  declined,  so  that  it  became  impossible 
for  the  banks  to  sell  the  government  securities,  which  they  held  to 
a  large  amount,  except  at  a  great  pecuniary  sacrifice.  This  cut 
off  one  source  from  which  they  had  been  obtaining  specie.  At 
the  same  time  people  became  frightened,  stopped  depositing  money 
in  the  banks,  thus  cutting  off  the  other  source.  Even  worse,  the 
deposits  began  to  be  witljdrawn  and  the  specie  reserve  dwindled 
at  an  appalling  rate.  About  twenty-seven  million  in  specie  were 
drawn  inland  from  the  New  York  banks  in  the  month  of  Decern-- 
ber,  by  far  the  larger  part  of  it  in  the  last  two 

Suspension  of  weeks.  It  was  all  outgo  now,  and  no  income. 
Specie  Payments.  ° 

The  end  was  but  a  question  of  time.  After  stand- 
ing the  strain  upon  their  reserves  for  two  weeks,  the  New  York 
banks  were  compelled,  in  order  to  save  themselves  from  complete 
exhaustion,  to  suspend  specie  payments  on  the  thirtieth  day  of 
December.  Banks  in  other  cities  speedily  followed  suit.  The 
suspension  of  the  national  Treasury  was  entailed  as  a  necessary 
consequence  of  the  suspension  of  the  banks.  Thus  the  first  day 
of  the  new  year  1862  saw  the  collapse  of  the  whole  scheme  of 
national  finance.^  ' 

Among  the  various  devices  for  raising  money  at  the  begin- 
ning of  the  war,  was  that  of  issuing  non-interest-bearing 
Treasury  notes  in  small  denominations  fitted  to  be  used  as 
currency.  Sixty  millions  of  these  had  been  authorized 
before  Mr.  Chase  negotiated  the  above-mentioned  loans. 
These  notes  were  payable  on  demand  and  were  receivable 

1  Mr.  Wesley  Mitchell  in  the  Journal  of  Political  Economy,  June, 
1899. 


no  GOVERNMENT    PAPER   MONEY 

for  taxes  and  duties  on  imports,  but  were  not  legal  tender. 
Mr.  Chase  was  paying  them  to  such  of  the  public  creditors 
as  were  'willing  to  receive  them,  simultaneously  with  his 
disbursement  of  the  gold  drawn  from  the  banks.  Thirty- 
three  millions  were  outstanding  when  specie  payments  were 
suspended.  They  were  called  "  demand  notes  "  in  distinc- 
tion from  the  subsequently  issued  legal-tender 
Bill.  *^^ '  ^"  ^^  notes.  The  bill  for  the  latter  was  first  pro- 
posed by  Mr.  Elbridge  G.  Spaulding,  a  mem- 
ber of  the  Committee  of  Ways  and  Means,  and  was  reported 
by  the  Committee  by  a  majority  of  one  vote  on  January  7, 
1862.  It  authorized  the  Secretary  of  the  Treasury  to  issue 
^150,000,000  of  United  States  notes  not  bearing  interest, 
payable  to  bearer,  of  denominations  not  less  than  $5.00 
each.  Fifty  millions  of  these  notes  were  to  be  in  lieu  of 
that  amount  of  the  demand  notes  aforesaid.  The  notes 
were  to  be  receivable  for  all  dues  to  the  government  and 
to  be  legal  tender  for  all  debts  public  and  private  within 
the  United  States  and  to  be  exchangeable  for  bonds  of  the 
United  States  bearing  interest  at  6  per  cent,  redeemable 
after  five  years  and  payable  in  twenty  years.  These  bonds 
were  familiarly  known  as  the  5-2 o's. 

A  delegation  of  bankers  from  New  York,  Boston,  and 
Philadelphia  came  to  Washington  to  remonstrate  against  the 
bill.  A  meeting  was  held  at  the  office  of  the  Secretary  of 
the  Treasury  on  January  11,  at  which  these  gentlemen  and 
the  members  of  the  financial  committees  of 
Bankers  remon-        j^      ^  ^^^    g^^^^^^    ^^^^     present.      Mr. 

strate  against  it.  ^ 

James  Gallatin,  in  behalf  of  the  bankers,  pre- 
sented a  plan  of  national  finance  which  would,  in  the  opinion 
of  those  gentlemen,  procure  the  means  for  carrying  on  the 
war  without  recourse  to  legal-tender  notes.  One  of  the 
proposals  was  to  "  issue  6  per  cent  twenty-year  bonds,  to 
be  negotiated  by  the  Secretary  of  the  Treasury,  and  without 


THE   GREENBACKS  III 

any  limitation  as  to  the  price  he  may  obtain  for  them  in 
the  market." 

Mr.  Spaulding  took  ground  at  once  against  this  plan. 
He  tells  us  that  he  "objected  to  any  and  every  form  of 
'shinning'  by  government  through  Wall  or  State  Street  to 
begin  with  ;  objected  to  the  knocking  down  of  government 
stocks  to  75  or  60  cents  on  the  dollar,  the  inevitable  result 
of  throwing  a  new  and  large  loan  on  the  market,  without 
limitation  as  to  priced 

In  order  to  avoid  selling  government  stocks  at  75  or  60 
cents  on  the  dollar  in  an  honest  way,  Mr.  Spaulding  initiated 
a  policy  which  ended  in  selling  those  stocks  at  40  cents  on 
the  dollar  in  a  roundabout  way,  and  cheating  creditors, 
soldiers,  and  laboring  men  out  of  more  than  half  their  dues 
in  an  incidental  way.  This  state  of  facts  he  mournfully 
acknowledges  in  his  book,  and  he  seeks  to  put  on  Mr.  Chase 
the  blame  for  too  much  inflation  of  the  currency.^  But  the 
man  who  opens  the  floodgates  has  no  right  to  complain  of 
the  inundation. 

Although  Mr.  Chase,  in  his  annual  report  for  December, 

1 86 1,  distinctly  rejected  the  idea  of  legal-tender  notes  (which 

was  already  in  the  air),  on  account  of  "the  immeasurable 

evils  of  dishonored  public  faith  and  national  bankruptcy," 

yet  on  January  22  following,  he  wrote  to  Mr. 

Mr.  Chase  assents  Spaulding  a  qualified  approval  of  his  bill.    The 

to  the  Legal-Ten-  ,  .   ^  „     , 

der  Bill.  letter  was  not  satisfactory  to  all  the  members 

of  the  Committee.     Consequently  a  resolution 

was   adopted,  asking  his   opinion   as  to  the   propriety  and 

necessity  of  the  immediate  passage  of  the  bill  by  Congress. 

1  "  He  [Chase]  left  the  office  with  twice  as  much  inflating  paper  out- 
standing as  ought  ever  to  have  been  issued,  and  with  the  promised 
dollar  printed  on  the  face  of  the  greenback  worth  only  35  to  40  cents 
in  gold." — Introduction  to  second  edition  of  Spaulding's  ^/«a««'d:/ 
History  of  the  War^  p.  11. 


112  GOVERNMENT   PAPER   MONEY 

His  answer  was  returned  on  the  twenty-ninth.  Much  un- 
necessary verbiage  was  employed  to  convey  the  Secretary's 
assent  to  the  legal-tender  clause,  but  he  gave  his  assent  and 
added  certain  reasons  for  it  which  had  not  been  advanced 
by  anybody  else.  He  said  that  some  people  gave  a  cordial 
support  to  the  government  by  taking  its  notes  at  par,  while 
others  did  not,  —  referring  to  the  "  demand  notes  "  which 
were  not  legal  tender.  "Such  discriminations,"  he  said, 
"  should,  if  possible,  be  prevented,  and  the  provision  mak- 
ing the  notes  a  legal  tender,  in  a  great  measure  at  least, 
prevents  it  by  putting  all  citizens  in  this  respect  on  the 
same  level,  both  of  rights  and  duties."  This  was  very 
plausible.  It  appealed  powerfully  to  the  spirit  of  patriotism. 
But  Mr.  Chase  was  a  victim  of  his  own  phrases.  The  duties 
of  the  citizen  are  to  submit  to  the  laws  of  conscription  and  of 
taxation,  and  his  rights  are  to  be  exempt  from  impressment 
and  confiscation.  If  others  enter  the  army  voluntarily  or 
give  their  money  to  the  government  outright,  those  acts  are 
over  and  above  duties.  They  rise  to  the  category  of  merits. 
The  bill  passed  the  House,  February  6,  1862,  by  93  to 
59.      The   legal-tender  clause,   however,   narrowly  escaped 

defeat   in    the   Senate.      On   Mr.    Collamer's 
The  Bill  passes.  .  .,       .  , 

motion  to  strike  it  out,  the  yeas  were  17  and 

the  nays  22.  Senator  Fessenden,  the  chairman  of  the  Com- 
mittee on  Finance,  spoke  and  voted  against  the  legal-tender 
clause,  but  he  did  not  oppose  it  vigorously.  In  any  narrow 
division  of  the  Senate  his  influence  would  have  been  deci- 
sive, if  he  had  exerted  it.  But  evidently  he  did  not  wish  to 
be  responsible  for  the  defeat  of  the  measure. 

Two  amendments  of  importance  were  added  by  the 
Senate  :  one  making  the  interest  on  the  government's  obli- 
gations payable  in  coin  ;  the  other  giving  the  Secretary  of 
the  Treasury  authority  to  sell  bonds  bearing  6  per  cent 
interest  at  any  time,  at  the  market  value  thereof,  for  notes 


THE   GREENBACKS  II3 

or  coin.  The  latter  clause  was  intended  to  enable  the  Sec- 
retary to  obtain  gold  at  some  price,  to  pay  the  interest  on 
the  bonds.  In  the  Conference  Committee  of  the  two 
houses  an  additional  plan  was  devised  for  this  end,  by 
making  duties  on  imports  payable  in  coin. 

The  bill  became  a  law  on  the  25th  of  February,  1862. 

On  the  7th  of  Tune  Mr.  Chase  asked  for 
The  Second  Issue. 

$150,000,000  more  notes.  A  bill  for  this  pur- 
pose was  passed  with  very  little  opposition.  It  provided 
that  not  more  than  $35,000,000  should  be  of  denominations 
smaller  than  $5.00. 

On  the  6th  of  March  Mr.  Stevens  introduced  a  bill  author- 
izing the  Secretary  of  the  Treasury  to  dispose  of  any  bonds 
or  notes  authorized  by  law,  for  coin,  on  such  terms  as  he 
should  deem  most  advantageous  to  the  public  interest. 
After  the  legal-tender  act  was  passed  it  was  remembered 
that  $60,000,000  of  demand  notes  were  outstanding,  which 

were  receivable  for  customs  duties.  If  duties 
chase  Act ^^'^"       should   be    paid  exclusively  in    these    notes, 

some  considerable  time  must  elapse  before 
any  coin  would  come  in  to  meet  the  interest  payments. 
Mr.  Stevens  said  that  it  was  impossible  to  sell  bonds  "at 
the  market  value,"  and  that  the  Secretary  of  the  Treasury 
had  sent  down  this  bill  and  wanted  to  have  it  passed 
at  once.  He  concurred  in  the  necessity  of  it  since  the 
coin  amendment  had  been  adopted  by  Congress,  although 
that  amendment  was  against  his  judgment.  The  bill  was 
passed  by  the  House  on  the  following  day,  and  by  the 
Senate  March  11,  without  a  division.  In  the  Senate  it 
was  amended  so  as  to  read  as  follows  : 

The  Secretary  of  the  Treasury  may  purchase  coin  with  any 
bonds  or  notes  of  the  United  States  authorized  by  law,  at  such 
rates  and  upon  such  terms  as  he  may  deem  most  advantageous  to 
the  public  interest. 


114  GOVERNMENT    PAPER    MONEY 

In  the  Revision  of  the  Statutes,  which  was  completed  in 
1874,  this  clause  was  wisely  retained  among  the  provisions 
of  law  "general  and  permanent  in  their  nature "  ;  for,  so  long 
as  the  Treasury  is  responsible  for  the  maintenance  of  parity 
between  gold  and  paper,  its  power  to  obtain  gold  ought  to 
be  unrestricted. 

When  Congress  assembled  in  December,  1862,  it  found 

that  the  most   sacred  obligation   of  the  government  —  the 

pay  of   the  army  and   navy  —  had   not   been 
Third  Issue.  ^   •'  ,      ,  ^  ,.       -^  .        , 

met,  and   that  great  distress   existed   among 

the  families  of  soldiers  in  consequence.  Mr.  Gurley,  of 
Ohio,  in  the  House  (January  15,  1863)  drew  a  most  harrow- 
ing picture  of  the  suffering  in  consequence  of  this  default. 
The  amount  of  pay  overdue  was  $59,000,000. 

It  is  not  possible  to  acquit  Mr.  Chase  of  responsibility  for 
this  default.  The  House  passed  a  resolution  asking  why  he 
had  allowed  the  pay  of  the  army  to  fall  into  arrears.  He 
had  power  under  the  law  to  sell  6  per  cent  bonds  at  their 
market  value  for  greenbacks  or  coin.  Why  had  he  not  done 
so  ?     His  answer  was  in  these  words : 

The  Secretary,  solicitous  to  regulate. his  action  by  the  spirit  as 
well  as  the  letter  of  the  legislation  of  Congress,  did  not  consider 
himself  at  liberty  to  make  sales  of  the  5-20  bonds  below  their 
market  value  ;  and  sales  except  below  were  impracticable. 

What  Mr.  Chase  meant  was  that  the  quoted  value  of  6  per 
cent  bonds  on  a  particular  day —  the  3d  of  January,  1863,  for 
example  —  was  98  in  currency.  But  if  the  Secretary  should 
offer  any  large  lot,  the  price  would  fall  below  98.  In  other 
words,  there  was  no  market  value  for  bonds,  although  there 
was  a  market  value  for  every  other  merchantable  thing  under 
the  sun.  There  was  much  feeling  against  Mr.  Chase  among 
congressmen,  on  account  of  this  interpretation  of  the  law 
which  they  had  passed  to  meet  every  financial  emergency. 


THE   GREENBACKS  II5 

The  Secretary's  scruples  on  this  subject  led  to  the  third 

batch  of  legal-tender  notes,  $100,000,000,  authorized  by  a 

joint  resolution  dated  January  13,  1863,  "for  the  immediate 

payment  of  the  army  and  navy  of  the  United 
Depreciation. 

States."     The  whole  amount  now  authorized 

was  $400,000,000.     The  price  of  gold  at  this  time  was  142; 

at  the  end  of  the  month  it  was  159.     Mr.  Spaulding  was 

surprised,  at  this  juncture,  to  find  that  there  was  a  great 

scarcity  of  currency.     This  he  attributed,  not  to  the  advance 

in  prices  which  had  absorbed  the  additions  to  the  circulating 

medium,  but  to  the  operations  of  the  army  and  navy.     He 

did  not  explain  how  the  operations  of  a  million  men  fighting 

and  destroying  property  should  call  for  more  currency  than 

those  of  the  same  number  engaged  in  peaceful  occupations 

at  home. 

Two  other  kinds  of  legal-tender  notes  were  issued  during 
the  war.  They  were  called  Treasury  notes  in  contradis- 
tinction to  the  former  ones,  which  were  called  United  States 
notes,  or  popularly  "greenbacks."  On  March  3,  1863, 
Congress  authorized  the  issue  of  $400,000,000  of  Treasury 
notes  of  denominations  not  less  than  $10,  to  run  not  more 
than  three  years,  to  bear  interest  not  exceeding  6  per  cent, 
payable  in  "  lawful  money,"  />.,  in  either  gold  or  United 
States  notes.  They  were  to  be  legal  tender 
Noir*'^^^"''^  for  their  face  value,  excluding  interest.  The 
object  of  this  law  was  to  obtain  loans  from 
small  investors  without  making  further  additions  to  the 
currency.  Anybody  having  $10  for  which  he  had  no  imme- 
diate use  could  buy  a  Treasury  note  for  that  sum.  He 
would  be  impelled  to  hoard  it  for  the  sake  of  the  interest, 
but  if  necessary  he  could  use  it  as  money  for  its  face  value, 
in  which  case  the  payee  would  be  impelled  to  hoard  it. 

Under  this  act  $44,520,000  of  one-year  notes  and  $166,- 
480,000  of  two-year  notes,  bearing  interest  at  5  per  cent, 


Il6  GOVERNMENT    PAPER   MONEY 

were  issued.  A  portion  of  these  notes  had  interest  coupons 
attached  to  them,  which  could  be  cut  off  and  collected  as 
the  interest  matured.  These  were  found  to  be  troublesome, 
since  they  caused  alternate  contraction  and  expansion  of 
the  currency.  When  the  accumulated  interest  was  sufficient 
to  make  it  worth  while  for  the  owner  to  keep  them  they 
would  be  hoarded,  and  when  the  coupon  was  cut  off  they 
would  be  put  in  circulation.  They  were  paid  off  by  the 
government  and  canceled  as  soon  as  possible. 

Under  this  act  there  were  issued  also  $266,595,440  of 
compound-interest  notes  to  run  three  years.  The.  rate  of 
interest  was  6  per  cent,  compounded  semi-annually,  and  the 
interest  was  payable  with  the  principal  at  maturity,  and 
not  otherwise.  On  the  back  of  the  note  was  a  printed  state- 
ment showing  its  value  at  the  end  of  each  six  months.  The 
$10  note  was  worth  $10.30  at  the  end  of  the 

i^ntereTNotes.      ^^^^  ^^^^  ^^^^  ^^^  $11.94  at  the  end  of  three 
years.      This  was   the   most   scientific   form 
of  legal-tender  notes  issued  during  the  war,  since  it  offered 
a  continuing  and  increasing  inducement  to  the  owner  to  hold 
them  as  an  investment  instead  of  putting  them  in  circulation. 
In  the  summer  of  1862  the  silver  subsidiary  coins  began 
to  grow  scarce.     By  the  coinage  act  of  1853  their  metallic 
value  had  been  reduced  7  per  cent,  but  they  remained  in 
circulation  with  the  greenbacks  until  the  latter  had  depre- 
ciated   more    than    7    per   cent.      Then,    in    obedience    to 
Gresham's  Law,  they  were  exported  and  sold  as  bullion,  or 
put   into   circulation    in    Canada.     As    small    change   thus 
became  scarce,  people  began  to  use  postage  stamps  as  a 
substitute.     The  demand  for  stamps  became 
rency!°''^^  ^'''"     greater  than  the  Post  Office  Department  could 
supply;    and   the    stamps   themselves,   being 
flimsy  and  sticky,  were  inconvenient  and  exasperating  to  the 
last  degree.     Private  individuals  began  to  issue  fractional 


ft 


THE   GREENBACKS  II7 

currency  and  copper  coins  in  great  numbers  and  varieties 
to  supply  an  indispensable  need.  On  July  17,  1862,  Con- 
gress authorized  the  issue  of  small  notes  to  take  the  place 
of  the  stamps  and  of  the  local  "  shin-plasters,"  as  they  were 
popularly  termed.  The  first  form  issued  was  a  piece  of 
paper  with  the  facsimile  of  a  5-cent  postage  stamp  in  the 
center  of  it.  The  2  5-cent  note  had  the  5-cent  stamp  five 
times  repeated.  This  was  called  "postage  currency."  By 
a  later  act  fractional  currency  was  issued  in  the  form  of 
promissory  notes  of  the  United  States  for  sums  less  than 
one  dollar.  All  of  these,  and  also  the  postage  currency 
notes,  were  redeemable  by  the  government  and  receivable 
for  all  taxes  except  duties  on  imports.  The  notes  were 
small  in  size,  as  well  as  of  small  denominations,  and  were 
easily  worn  out  and  lost.  The  largest  amount  in  circulation 
at  any  time  was  about  $27,000,000.^ 

On  March  3,  1863,  Congress  passed  a  law  providing  for  an 
issue  of  bonds  bearing  interest  at  5  per  cent,  redeemable  in 

ten  years  and  payable  in  forty  years,  —  known 
The  10-40  Bonds.  ,  ,         rr^         r  r  • 

as  the  10-40  s.     .Iwo  features  of  importance 

are    to   be  noted   in   this   measure.     One  was  a  provision 

making  the  principal,  as  well  as  the  interest,  of  these  bonds 

payable  in  coin.     The  other  was  the  repeal  of  the  clause  of 

the  legal-tender  act  which  made  the  notes  convertible  into 

bonds  at  par. 

When  the  legal-tender  act  was  passed,  creating  two  kinds 

of  public  debt,  bonds  and  notes,  nobody  dreamed  of  paying 

the  former  with  the  latter.     If  any  member  of  Congress  had 

risen  in  his  place  while  the  bill  was  pending,  and  said  that 

the  government  might  sell  $150,000,000  of  interest-bearing 

bonds  for  gold,  and  then  pay  them  off  with  the  $150,000,000 

of  non-interest-bearing   and  irredeemable  notes  authorized 

1  See  article  on  "The  Private  Issue  of  Token  Coins,"  by  R.  P.  Falkner, 
in  the  Political  Science  Quarterly^  June,  1901. 


Il8  GOVERNMENT    PAPER   MONEY 

by  the  same  act,  he  would  have  been  considered  a  lunatic. 
But  a  year  had  not  elapsed  before  a  considerable  stir  was 
created  by  persons  who  held  that  all  the  government  bonds 
then  outstanding  might  be  lawfully  paid  with  greenbacks. 
Accordingly,  Congress  made  the  principal  of  the  10-40's,  as 
well  as  the  interest,  payable  in  coin. 

On  the  first  of  January,  1863,  an  old  debt  of  the  govern- 
ment, contracted  in  1842,  for  $8,600,000  became  due,  and 
Secretary  Chase  paid  it  in  gold.  The  House 
paldki"Gow°"^^  of  Representatives  had  previously  asked  him 
by  resolution  (December  16)  in  what  kind  of 
money  he  intended  to  pay  it.  He  postponed  the  answer 
until  he  had  actually  paid  it.  He  then  said  (January  5)  that 
he  had  paid  it  in  coin  in  order  to  keep  the  government's 
credit  good. 

It  was  disclosed  later  that  the  country  had  narrowly 
escaped  a  great  danger.  The  Treasury  had  no  gold  at  that 
time,  or  not  sufficient  to  meet  the  claim,  and  some  persons 
talked  of  paying  it  with  legal-tender  notes.  At  the  last 
moment  Mr.  John  J.  Cisco,  the  assistant  treasurer  of  the 
United  States  in  New  York,  obtained  $8,000,000  gold  from 
the  banks  in  exchange  for  legal-tender  notes,  on  his  personal 
pledge  to  redeem  the  notes  with  the  first  gold  that  came  into 
his  hands  from  customs  duties.  With  the  gold  so  obtained 
Mr.  Chase  paid  the  debt.^ 

Mr.  Chase  desired  to  have  the  funding  clause  of  the  legal- 
tender  act  repealed,  because,  as  long  as  the  holders  of  notes 
could  convert  them  into  6  per  cent  bonds  at  par,  no  bonds 
could  be  sold  bearing  a  lower  rate  of  interest.  He  believed 
that,  if  this  privilege  were  taken  away,  a  loan  could  be  nego- 
tiated at  5  per  cent.    Congress  yielded  to  his  request,  fixing 

1  See  letter  of  George  S.  Coe  in  Spaulding's  Financial  History  of 
the  War,  second  edition,  appendix,  p.  94. 


THE    GREENBACKS  119 

a  date  (July  i,  1863)  when  the  right  of  conversion  should 
cease.     This    was   an  inexcusable   breach  of    contract   and 

a  financial  blunder.  By  preventing  the  volun- 
fe"  eaied  ^^^"^^      tary    conversion   of    the   notes   into  bonds   it 

prevented  the  early  resumption  of  specie  pay- 
ments after  the  close  of  the  war,  as  Chief  Justice  Chase 
acknowledged  in  his  dissenting  opinion  in  the  Legal  Tender 
Cases.  Whenever  the  rate  of  interest  on  government  secu- 
rities in  the  money  market  should  be  less  than  6  per  cent, 
as  it  was  immediately  after  the  war,  the  notes  would  be 
converted  into  bonds  and  retired.  This  operation  being 
automatic,  being  part  of  a  contract,  and  coinciding  with 
public  opinion  at  the  close  of  the  war,  which  was  favorable 
to  specie  resumption,  would  probably  have  worked  out  that 
result  within  a  brief  period. 

In  June,  1864,  Congress  enacted  that  the  whole  amount 
of  greenbacks  issued  or  to  be  issued  should  never  exceed 
$450,000,000,  the  last  $50,000,000  being  a  temporary  issue. 
When  the  war  came  to  an  end  and  the  army  was  paid  off 
and  disbanded  the  amount  remained  fixed  in  the  law  at 
$400,000,000. 

Secretary  Chase  resigned  his  office  June  30,  1864,  and 
was  succeeded  by  W.  P.  Fessenden.  Mr.  Chase's  last  finan- 
cial act  was  the  preparation  of  a  bill,  which  he  induced  Con- 
gress to  pass,  to  "  prohibit  certain  sales  of  gold  and  foreign 
exchange."  ^     It  prohibited  sales  of  gold  unless  the  person 

selling  it  had  it  in  his  actual  possession  and 
Law^""^''^"^^       delivered  it  to  the  buyer  the  same  day.     It 

prohibited  the  purchase  or  sale  of  foreign 
exchange  to  be  delivered  more  than  ten  days  subsequently. 
It  provided  also  that  no  purchases  or  sales  of  gold  coin  or 
bullion  or  of  foreign  exchange  should  be  made  except  at  the 
ordinary  place  of  business  of  the  seller  or  purchaser  occupied 

1  Shucker's  Life  of  Salmon  P.  Chase,  p.  359. 


I20  GOVERNMENT    PAPER   MONEY 

by  him  individually.     Violation  of  the  law  was  punishable 

by  fine  or  imprisonment  or  both,   the   smallest  fine  being 

$1000.     The  idea  of  Mr.  Chase  and  of  the   congressmen 

who  voted  for  the  bill  was  that  the  brokers  caused  the  price 

of  gold  to  advance.     They  imagined  that  they  could  stop 

the  advance  by  an  act  of  Congress.     Mr.  Chase  was  of  that 

opinion.     Three  days  after  the  passage  of  the  law  he  wrote 

to  Horace  Greeley:  "The  price  of  gold  must  and  shall  come 

down,  or  I  '11  quit  and  let  somebody  else  try."  ^ 

This  measure  became  a  law  June  17,  1864.     It  remained 

on  the  statute  book  only  two  weeks.     On  the  day  it  passed 

gold  was  quoted  at   108.      The  next   day  it 
Its  Repeal.  ^^  ^     ,  ^      ,  ,  ,      r    . 

was  208,  the  next  230,  and  at  the  end  of  the 

month  250.  At  no  time  before  had  there  been  so  rapid  an 
advance.  Congress  repealed  the  act,  without  debate,  on  the 
2d  of  July. 

Early  in  1864  Congress  discovered  that  the  issuing  of 
greenbacks  must  be  stopped  and  the  policy  of  heroic  taxa- 
tion adopted.  Laws  were  passed  which  yielded  in  1866  a 
clear  revenue  of  $558,032,620.  This  was  equal  to  two- 
thirds  of  the  entire  expenditures  in  1864.  If  taxation  on 
this  scale  had  been  enacted  in  1862  it  would  have  yielded 
in  1864  as  much  as  that  of  1864  did  in  1866,  and  the  gov- 
ernment's credit  would  have  been  strengthened  in  propor- 
tion to  its  income.  Fewer  legal-tender  notes  would  have 
been  required,  the  prices  of  commodities  would  not  have 
advanced  to  any  great  extent,  and  the  cost  of  the  war  to  the 
taxpayers  would  have  been  much  less  than  it  was.^ 

1  See  letters  of  Chase  to  Greeley  in  the  New  York  Daily  Tribune, 
January  20,  1895. 

2  Professor  Simon  Newcomb,  in  his  work  on  Our  Financial  Policy 
during  the  Soicthern  Rebellion,  published  in  1865,  but  written  before 
the  war  was  ended,  computed  the  government's  net  loss  due  to  the 
use  of  a  depreciated  currency,  down  to  the  end  of  the  year  1864,  at 


THE    GREENBACKS  121 

The  question  whether  legal-tender  notes  were  necessary 

at  the  time  when  they  were  issued,  i.e.^  whether  the  war 

^     _      ,  could  have  been  carried  on  without  them,  has 

Were  Legal-  ' 

Tender  Notes  been  much  disputed,  and  very  respectable 
Necessary?  authorities  are  to  be  found  on  either  side  of 

it.     Some  are  to  be  found  on  both  sides,  and  among  these 

$180,000,000,  and  estimated  the  loss  still  to  be  incurred,  even  if  the  war 
should  end  immediately,  at  $300,000,000  more,  or  $480,000,000  in  all. 
According  to  his  reckoning  the  government  saved  $97,000,000  during 
the  first  year  of  the  war  by  paying  greenbacks  instead  of  selling  bonds, 
since  it  paid  them  to  its  creditors  at  something  near  par  in  gold, 
whereas  the  gold  price  of  its  6  per  cent  bonds  in  the  market  ranged 
between  78  and  90.  By  paying  $1000  in  greenbacks  the  government 
got  nearly  $1000  worth  of  property,  gold  value;  whereas,  if  it  had 
sold  a  $1000  bond,  it  would  have  received  only  $780  to  $900.  "  We 
were  enabled  to  pay  off  contracts  made  when  gold  was  at  par,  with 
notes  after  they  had  depreciated  one-third."  But  the  progressive 
decline  in  the  purchasing  power  of  greenbacks  turned  the  scale.  In 
the  third  quarter  of  1863  the  government  made  an  average  loss  of  10 
per  cent  in  its  purchases,  and  this  loss  rose  to  68  per  cent  at  the  end 
of  1864.  In  1865  the  government  was  paying,  with  currency  worth  75 
cents  per  dollar,  debts  contracted  when  it  was  worth  only  40  or  50 
cents  per  dollar,  and  after  1879  i*^  P^id  100  cents  on  bonds  sold  at 
various  rates  of  discount. 

In  his  work  on  Public  Debts  Professor  H.  C.  Adams  computes  the 
extra  cost  of  the  war  to  the  taxpayers,  in  consequence  of  the  use  of  a 
depreciated  currency,  at  $850,000,000.  This  is  the  difference  between 
the  debt  created  and  the  gold  value  of  the  currency  which  the  govern- 
ment received  for  its  obligations. 

Mr.  Wesley  Mitchell,  in  the  Journal  of  Political  Economy,  March, 
1897,  computes  the  net  increase  in  the  cost  of  the  war,  due  to  this 
cause,  at  $528,400,000.  In  reaching  this  sum  he  assumes  that  the 
government's  receipts  were  increased  $228,700,000  by  the  use  of  green- 
backs. In  this  calculation  he  assumes  that  the  government's  receipts 
from  internal  revenue  were  increased  to  the  full  extent  of  the  depre- 
ciation of  the  currency,  but  he  acknowledges  that  there  is  room  for 
doubt  whether  this  was  the  fact.  Mr.  Mitchell's  paper  is  well  worth 
examination,  but  it  is  too  complicated  for  reproduction  here,  even  by 
way  of  summary. 


122  GOVERNMENT    PAPER   MONEY 

is  Mr.  Chase  himself.  What  he  said  as  Secretary  of  the 
Treasury  we  have  seen.  As  Chief  Justice  of  the  Supreme 
Court  at  a  later  period  he  held  not  only  that  the  legal- 
tender  act  was  unconstitutional  as  appHed  to  preexisting 
debts,  but  that  legal  tender  did  not  add  anything  to  the 
value  or  usefulness  of  the  notes.  "  The  legal-tender 
quality,"  he  said,  "was  valuable  only  for  purposes  of  dis- 
honesty. Every  honest  purpose  was  answered  as  well  or 
better  without  it."  ^ 

A  nation  pays  its  annual  expenses,  in  war  as  well  as  in 
peace,  out  of  its  annual  earnings,  except  so  far  as  it  borrows 
from  foreigners,  and  the  only  question  for  the  Minister  of 
Finance  is  how  to  lay  his  hands  upon  the  portion  he  needs. 

Issuing  legal-tender  notes  is  one  way ;  taxa- 
wt^FtaaSinl.  tio"  is  another.     The  principal  advantage  of 

the  former  method  is  that  it  can  be  put  in. 
operation  immediately,  whereas  taxation  involves  delay.  On 
the  other  hand,  taxation  strengthens  the  government's  credit 
and  enables  it  to  borrow  for  its  immediate  needs  until  the 
taxing  machinery  can  be  put  in  working  order.  Moreover, 
the  government  may  borrow  by  means  of  interest-bearing 
notes,  which  are  not  legal  tender.  Not  to  multiply  words 
about  the  assumed  necessity  of  legal-tender  notes  in  the 
Civil  War,  it  may  be  safely  said  that  other  methods  ought  to 
have  been  exhausted  first.  Mr.  Don  C.  Barrett  has  shown 
(in  the  Quarterly  Journal  of  Ecofiomics^  May,  1902)  that  the 
needs  of  the  government  in  1862  were  actually  met  by  tem- 
porary deposits  and  certificates  of  indebtedness  before  the 
greenbacks  could  be  engraved,  printed,  and  issued. 

One  of  the  reasons  advanced  by  Senator  Fessenden  for 

opposing  the  legal-tender  clause  was  that  the  loss  would 

fall  most  heavily  on  the  poor.     All  tricks  of  legerdemain 

1  See  his  dissenting  opinion  in  the  Legal  Tender  Cases,  12  Wallace, 

457- 


THE   GREENBACKS  1 23 

with  the  currency  bear  most  heavily  on  the  poor.     Take  a 

concrete  case.     The  government  wanted  guns.     It  paid  for 

them  with  legal-tender  notes.     The  manufac- 

T^nder^on  wiges.  ^^^^^  ^^^^  P^^  ^^^^  ^°  ^^^  workmen,  who  must 
buy  their  supplies  of  all  kinds  in  a  rising  mar- 
ket. The  cost  of  living  not  merely  followed  the  gold  premium, 
but  generally  kept  above  it.  The  dealers  in  commodities 
advanced  their  prices  faster  and  farther  than  gold  advanced, 
in  order  thus  to  insure  themselves  against  loss  by  rapid 
fluctuations.  Valuable  lessons  may  be  learned  by  consider- 
ing the  variations  in  the  purchasing  power  of  a  soldier's 
monthly  pay  over  commodities  for  each  quarter  of  the  four 
years  of  the  war,  as  compared  with  the  prices  of  January, 
i860.  The  pay  was  nominally  $13  per  month.  In  the  third 
quarter  of  1862  it  would  buy  $11.26  worth  of  gold  and  $11.11 
of  the  commodities  usually  consumed  in  the  family.  One 
year  later  it  would  buy  $9.96  gold  and  $8.07  commodities. 
One  year  later  Congress  raised  the  pay  to  $16  nominally, 
but  even  then  (July,  1864)  the  gold  value  of  the  pay  was 
only  $6.19  and  its  purchasing  power  over  commodities 
$6.40.  In  April,  1865,  the  gold  value  of  the  month's  pay 
had  risen  to  $10.77,  ^^^  ^^^  value  in  commodities  was  only 

$7-69.' 

The  question,  in  what  manner  wages  responded  to  the 
advance  in  prices  during  the  war,  is  an  important  one. 
Professor  Taussig,  of  Harvard  University,  made  a  computa- 
tion reaching  substantially  the  foregoing  conclusions,  which 
he  placed  in  graphical  form.  "  It  will  be  seen,"  he  says, 
"  that  money  wages  responded  with  unmistakable  slowness 
to  the  inflating  influences  of  the  Civil  War.  In  1865, 
when  prices  stood  at  217   as  compared  with   100  in   i860, 

wages  had   only  touched    143.     The  course  of  events  at 

• 
1  See  article  by  Mr.  Wesley  Mitchell  in  the  Journal  q/  Political 
Economy,  March,   1897. 


124 


GOVERNMENT    PAPER   MONEY 


this  time  shows  the  truth  of  the  common  statement  that  in 
times  of  inflation  wages  rise  less  quickly  than  prices,  and 
that  the  period  of  transition  is  one  of  hardship  to  the  wage- 
receiving  class."  ^ 

Professor  Taussig's  Chart  showing  the  Course  of  Wages 
AND  Prices  of  Commodities 


1840   '45 


We  may  here  note  the  difference,  in  their  effect  on  prices, 
between  new  supplies  of  gold  and  additions  to  the  volume  of 
an  irredeemable  currency.  Nobody  advances  the  price  of  his 
goods  because  new  gold  is  coming  out  of  the 
Tc^rZ^::.  ^■•"""d.  Everybody  knows  that  the  gold  he 
receives  to-day  is  final  payment,  and  that  it  will 
be  accepted  by  others  at  the  same  general  value  to-morrow. 
Quite  otherwise  is  the  effect  of   an  issue   of  irredeemable 

1  Paper  read  before  the  International  Statistical  Institute  at  Chicago, 
1893- 


THE    GREENBACKS  I 25 

paper.  This  is  not  final  payment,  but  only  a  promise  to  pay 
at  some  indefinite  time.  The  promise  is  also  uncertain 
of  fulfillment.  Not  all  men  realize  these  facts  at  first,  but 
there  are  always  some  who  do,  especially  bankers  and  deal- 
ers in  foreign  goods.  To  the  latter  class  it  is  a  matter  of 
doubt  whether  they  can  replace  their  goods  at  the  prices  they 
formerly  paid.  Accordingly  they  will  buy  foreign  exchange 
(which  means  gold  abroad)  in  anticipation  of  their  needs. 
This  unusual  demand  will  cause  an  advance  in  foreign 
exchange  and  also  in  the  prices  of  the  exportable  commodi- 
ties (including  gold),  by  which  foreign  exchange  is  made. 
Eventually  the  advance  will  extend  to  all  goods,  domestic  as 
well  as  foreign,  because  producers  and  dealers  find  that  they 
cannot  replace  their  stocks  at  the  same  prices  as  before. 
The  advance  is  usually  slow  at  the  beginning.  Thus, 
although  specie  payments  were  suspended  on  the  30th  of 
December,  1861,  the  premium  on  gold  did  not  reach  4  per 
cent  until  the  month  of  May  following. 

When  the  premium  on  gold  became  noticeable  in  January, 
1862,  the  business  of  buying  and  selling  it  began  naturally 
in  the  shops  of  those   Wall    Street  brokers  who  dealt  in 
foreign  coins.     These  brokers  had  gold  and  silver  on  exhi- 
bition in  their  windows.     People  who  wanted 

^'^oliT'^^^^"^  coin  went  there  to  buy  it.  Those  who  wanted 
in  (rOla.  •' 

to  sell  coin  for  greenbacks  naturally  went  there 
also.  Gradually  the  dealings  in  front  of  their  offices  became 
so  large  that  the  traders  blocked  the  sidewalks,  and  the 
public  authorities  were  obliged  to  give  special  orders  to  the 
police  to  keep  the  crowds  moving.  The  business  being 
thus  interrupted,  the  dealers  took  up  their  quarters  in  a 
neighboring  restaurant,  where  the  business  went  on  until  it 
outgrew  its  accommodations.  Then  the  need  of  a  Gold 
Exchange  was  recognized.  Thirty  or  forty  men  who  had 
been  in  the  habit  of  meeting  in  the  restaurant  formed  a 


126  GOVERNMENT    PAPER   MONEY 

loose  organization,  hired  a  hall,  and  adopted  rules  by  which 
any  respectable  man  could  become  a  member  by  paying  $ioo 

per  year,  to  defray  the  expenses.     This  was 
organized *°^^      ^^  ^^^  autumn  of  1862.     It  was  a  voluntary 

organization,  existing  under  the  rule  of  honor. 
Eventually  it  had  450  members,  consisting  of  bankers, 
brokers,  and  merchants  of  the  principal  cities  of  the  Union. 
At  first  the  business  was  carried  on  by  the  manual 
delivery  of  gold  in  return  for  certified  bank  checks.  To  do 
this  the  gold  had  to  be  carried  through  the  streets  by  mes- 
sengers, who  were  sometimes  knocked  down  and  robbed. 
To  facilitate  the  transactions  the  Treasury,  in  1865,  began 
to  issue  gold  certificates  of  deposit,  under  authority  of  a  law 
passed  two  years  earlier.  By  and  by  the  business  became 
so  large  that  it  could  not  be  carried  on  by  manual  delivery, 

even  with  the  help  of  gold  certificates.     Then 
BanV''^^"^^      the  Gold  Exchange  Bank  was  started  as  an 

adjunct  to  the  Gold  Exchange.     This  was  an 

institution  incorporated  under  the  laws  of  New  York,  with  a 

capital  of  $1,000,000.      It  did  a  regular  banking  business 

with  its  own  capital,  and  it  acted  as  a  clearing  house  for 

the. Gold  Exchange  at  a  fixed  rate  of  compensation. 

The  method  of  clearing  was  as  follows  :  Each  transaction 

was  noted  on  a  "ticket  of  advice"  signed  by  both  buyer 

and  seller.     All  the  tickets  were  passed  into  the  bank.     If 

Mr.  A.  had  bought  $1,000,000  worth  of  gold  from  various 

persons    at   various   prices    and   had    sold    $999,000,  then 

instead   of  receiving  from  and  paying  to  all 
Gold  Clearings.        ,  ,      ,  *  ,  ,  ,  ,  •  ,       , 

these  people  he  would   settle   only  with  the 

bank.     He  would  receive  at  the  close  of  the  day  $1000  in 

gold  and  would  pay  whatever  sum  in  greenbacks  was  due 

from  him  as  the  resultant  of  all  his    transactions.      The 

usual   daily  amount  of  such  clearings  was  $60,000,000  to 

$70,000,000. 


THE    GREENBACKS  I 27 

All  the  foreign  trade  of  the  country,  both  imports  and 
exports,  was  regulated  by  the  daily  and  hourly  quotations  of 
the  Gold  Room.  This  trade  could  not  have  been  carried 
on  otherwise.  The  wholesale  prices  of  all 
A  Commercial  importable  and  exportable  commodities  were 
regulated  by  the  quotations.  Retail  prices 
were  affected  at  longer  range.  That  is,  the  retail  dealers 
were  obliged  to  fix  their  prices  high  enough  to  cover  fluctu- 
ations and  to  save  themselves  from  loss.  The  consumer 
was  not  able  to  buy  at  the  lowest  price  that  the  law  of 
competition  would,  under  other  circumstances,  have  made. 
Commodities  not  of  an  exportable  or  importable  kind  were 
affected  in  less  degree  and  at  still  longer  range,  but  were 
not  exempt  from  the  influence.  In  short,  the  whole  trade 
of  the  country,  both  external  and  internal,  pivoted  on  the 
Gold  Exchange.  Gold  being  the  universal  liquidator  of 
commerce,  it  was  necessary  to  know  where  and  at  what 
price  it  could  be  obtained  in  any  desired  quantity.  The 
Gold  Exchange  gave  the  answer  to  this  question  daily  and 
hourly,  and  was  accordingly  indispensable. 

During  seventeen  years  the  business  of  the  country  was 
regulated  by  the  quotations  of  the  Gold  Exchange  and  was 

exposed  to  the  raids  of  gold  gamblers.  The 
Gambling  Raids.  ,.  .     ,  ,       ,,  t^,      1     t-  • 

most  disastrous  of  these  was  the  "  Black  Fri- 
day conspiracy,"  which  was  a  trap  set  for  exporters.  The 
export  trade  of  the  country  at  that  time  necessitated  the 
selling  of  gold  in  advance  of  its  delivery.  A  buyer  of  wheat 
or  cotton  for  export  would  make  his  purchase  according  to 
the  current  price  of  gold,  but  he  would  not  get  his  returns 
from  abroad  for  some  weeks,  nor  could  he  get  a  negotiable 
bill  of  lading  immediately.  If  the  price  of  gold  should  fall 
meanwhile,  he  would  be  a  loser.  So  he  would  sell  at  once 
the  gold  which  he  expected  to  receive  later.  He  w^ould  do 
this  by  giving  an  order  to  a  broker  in  the  Gold  Exchange  to 


128  GOVERNMENT    PAPER    MONEY 

sell,  putting  up  a  small  margin  as  a  guaranty  against  possible 
fluctuations.  Thus  both  the  exporter  and  the  broker  would 
be  protected,  unless  the  fluctuations  should  be  so  great  as  to 
prevent  the  exporting  merchant  from  keeping  his  margin 
good.     In  the  latter  event  he  might  be  ruined  altogether. 

The  act  of  "selling  short"   is  most  commonly  frowned 
upon    as   something    akin   to   gambling.     In   this   case   the 
gambling  consisted  in  not  selling  short.     A  fluctuating  cur- 
rency introduces  the  gambling   element   into 
"Selling Short."     „   ,        .  ,     ^  •  Ti      •    ^     .i,     ^ 

all  busmess,  but  more  especially  into  the  for- 
eign trade  of  a  country.  By  selling  at  once  the  gold  that 
he  expected  to  receive  for  his  outward  cargo,  the  exporter 
was  doing  a  legitimate  business.  By  waiting  till  his  cargo 
arrived  and  his  returns  became  available  he  took  the  risks 
of  any  amount  of  fluctuation  in  the  interval. 

Mr.  Jay  Gould,  who  was  at  that  time  president  of  the 

Erie  Railway,  and  a  daring  speculator,  conceived  the  idea 

of   buying  all  the  gold  in  the  market  and  compelling  the 

"  short "  sellers  to  buy  of  him,  when  their  contracts  should 

mature.     He  organized  a  clique  of  brokers,  speculators,  and 

Tammany  Hall  politicians,  who  succeeded  by  various  devices 

and  by  enormous  purchases  in  carrying  the  price  up  from 

133  to  162  in  about  twenty  days,  the  greater  part  of  the  rise 

being  in  two  days,  September  2^-24.  The 
Black  Friday.  y    »         r  o      t 

24th  was  always  afterwards  known  as  Black 

Friday.     About  250  persons  and  firms  were  caught  "short" 

of  gold,  who  had  no  way  of  meeting  their  contracts  except 

by  buying  it  of  Gould  and  his  party.     The  consequences 

were  thus  described  by  a  Committee  of  Congress,  of  which 

General  Garfield  was  chairman : 

Hundreds  of  firms  engaged  in  legitimate  business  were  wholly 
ruined  or  seriously  crippled.  Importers  of  foreign  goods  were 
for  many  days  at  the  mercy  of  gamblers  and  suffered  heavy  losses. 
For  many  weeks  the  business  of  the  whole  country  was  paralyzed, 


THE   GREENBACKS  I  29 

a  vast  volume  of  currency  was  drawn  from  the  great  channels  of 
industry  and  held  in  the  grasp  of  the  conspirators.  •  The  founda- 
tions of  business  morality  were  rudely  shaken,  and  the  numerous 
defalcations  that  shortly  followed  are  clearly  traceable  to  the  mad 
spirit  engendered  by  speculation. 

Black  Friday  and  its  evil  consequences  were  due  to  the 
existence  of  a  bad  currency  and  a  fluctuating  standard  of 
value.  The  Gold  Room  was  at  that  time  a  necessity. 
Business  could  not  be  carried  on  without  it,  but  it  offered 
temptations  and  facilities  for  gambling  which  could  not  be 
resisted ;  and  this  gambling  was  more  calamitous  than  any 
other,  because  the  prices  of  all  commodities  and  securities 
were  affected  by  it.  It  was  only  an  exaggerated  and  glar- 
ing illustration  of  the  evils  of  an  unstable  currency. 

When  the  war  came  to  an  end  in  May,  1865,  the  price 
of  gold  sank  to  130,  at  which  rate  greenbacks  were  worth 
77  cents  per  dollar.  It  had  been  as  high  as  285  in  July, 
1864,  greenbacks  being  then  worth  36  cents.  The  dif- 
ference between  these  extreme  quotations  may  be  taken 
to  represent  changes  in  the  public  credit,  or  various  vicissi- 
tudes and  states  of  mind,  dependent  upon  the  war,  wholly 
apart  from  the  redundancy  of  the  circulation,  since  the 
currency  was  no  greater  in  volume  at  the  one  date  than 
at  the  other. 

The  baleful  effect  of  these  fluctuations  was  shown  very 

clearly  in  California.     As  that  state  was  an  integral  part  of 

the  Union,  the  legal-tender  act  was  as  valid 

California  ad-  there  as  elsewhere,  yet  the  greenbacks  never 
heres  to  the  Gold    ,  ^   ^,  ^-i      r^ 

Standard.  became  current  there  until  after  specie  pay- 

ments were  resumed.  California  had  no 
banks  of  issue  and  was  entirely  unfamiliar  with  paper 
money.  It  was  not  without  a  severe  struggle,  however,  that 
the  gold  standard  was  maintained.  The  claims  of  loyalty 
were    imported    into  the    controversy,    and   it   was    stoutly 


130  GOVERNMENT    PAPER   MONEY 

insisted  by  the  greenback  party  that  unwillingness  to  use 
legal-tender^  notes  was  akin  to  treason.  Their  opponents 
replied  that  they  were  entirely  willing  to  use  the  notes  at 
their  actual  value,  but  not  at  a  higher  value.  They  con- 
tended that,  except  for  past  debts,  greenbacks  could  not 
be  used  at  anything  above  their  actual  value,  because  the 
prices  of  commodities  would  fluctuate  in  some  near  propor- 
tion to  the  fluctuations  of  the  currency.  If  taken  for  more 
than  their  actual  value  by  ignorant  persons,  such  persons 
would  be  cheated.  In  regard  to  past  debts  they  said  that 
it  would  be  unjust  to  pay  less  value  than  the  parties  had 
agreed  for.^ 

There  is  an  advantage  in  studying  the  events  in  Califor- 
nia at  this  time,  because  what  happened  there,  in  plain  sight 
and  hearing,  took  place  on  an  immensely  larger  scale  else- 
where, but  was,  for  the  most  part,  unnoticed. 

There  were  no  railways  to  the  Pacific  coast  at  that  time, 
hence  several  months  elapsed  before  any  commercial  effects 
were  produced  by  the  legal-tender  act.  On  the  17th  of 
September,  1862,  a  firm  in  San  Francisco  published  a  letter 
in  the  Alia  California  saying  that  they  had  been  compelled 
to  receive  many  thousands  of  dollars  in  legal-tender  notes 
for  goods  which  they  had  bought  for  gold  and  had  sold  on 
credit  at  gold  prices.  They  had  tendered  the 
menfs^"^^^"^^^^  notes  to  their  employees  in  payment  of  w^ages, 
but  the  latter  had  refused  to  receive  them, 
saying  that  the  boarding  houses,  the  butchers,  and  the 
grocers  would  not  take  them  at  par.  "  For  ourselves,"  said 
the  firm,  "we  wish  to  maintain  the  government,  but  we 
would  like  the  burden  to  fall  equally  on  all  classes." 

On  March  5,  1863,  a  victim  of  the  legal-tender  law 
wrote  to  the  Evening  Bulletin  of  San  Francisco  that  he  had 

1  See  article  "  Legal  Tender  Notes  in  California,"  in  the  Quarterly 
Journal  of  Economics^  October,  1892,  by  Professor  Bernard  Moses. 


THE   GREENBACKS  I3I 

lent  $10,000  in  gold  coin  four  years  previously  to  a  man  in 
Sacramento,  taking  his  note  for  it.  The  promissory  note 
was  lodged  at  the  banking  house  of  D.  O.  Mills  &  Co. 
for  collection.  The  borrower  came  to  the  bank  and  ten- 
dered $10,000  in  greenbacks  as  full  payment. 

Scv6r6  L0SS6S 

Greenbacks  were  then  worth  68  cents  on  the 
dollar.  D.  O.  Mills  &  Co.  refused  to  receive  the  tendered 
greenbacks  without  the  consent  of  the  owner  of  the  note, 
and  denounced  the  conduct  of  the  debtor  as  unfair  in 
the  extreme.  After  a  protracted  dispute  the  creditor 
accepted  the  $10,000  in  greenbacks  and  $1000  in  gold, 
rather  than  enter  upon  a  doubtful  lawsuit.  His  loss  then 
was  $2200,  but  as  he  kept  the  notes  a  few  months,  it 
became  $3500. 

Business  was  thrown  into  confusion  by  the  contrariety  of 
practice  in  different  parts  of  the  state  with  reference  to 
greenbacks.  Attempts  were  made  to  introduce  into  promis- 
sory notes,  invoices,  and  bills  of  sale  a  clause  stipulating 

for  payment  in  gold,  and  these  attempts  were 
Business.  partially   successful,  but   this   could   not   be 

done  with  accounts  current,  with  telegraphic 
orders,  or  with  retail  trade  conducted  on  the  credit  system. 
On  the  8th  of  November,  1862,  the  merchants  of  San 
Francisco  entered  into  a  written  agreement  not  to  receive 
or  pay  legal-tender  notes  except  at  their  market  value  in 
gold.  Country  merchants  were  invited  to  sign  it  also.  If 
anybody  should  refuse  to  sign  or  should  violate  the  agree- 
ment, the  others  would  decline  to  have  any  business  trans- 
actions with  him.  This  plan  was  slow  in  getting  into 
operation  and  could  not  be  made  comprehensive  enough 
to  meet  the  emergency,  since  it  included  regular  dealers 
only,  and  not  transient  customers. 

Presently  a  case  came  into  court,  where  a  citizen  had  ten- 
dered  greenbacks  for   state   taxes  and   the   collector  had 


132  GOVERNMENT   PAPER   MONEY 

refused  to  receive  them.     The  Supreme  Court  of  the  state 

decided  that  taxes  were  not  "  debts,"  and  hence  that  the 

legal-tender  law  did  not  apply  to  them.     This 

Greenbacks  not      y[q^  ^^s  eventually  sustained  by  the  Supreme 
Legal  Tender  for  ,     ,       ^^    .      ,    _,  _,         ,      .   . 

Taxes.  Court  of  the  United  States.      The  decision 

of   the  state  court  had  a  great  influence  on 

local  public  opinion,   by  strengthening  the  hands   of   the 

anti-greenback  men. 

In  October,  1862,  the  Board  of  Supervisors  of  San  Fran- 
cisco adopted  a  resolution  to  pay  the  interest  on  city  and 
county  bonds  in  gold  coin  and  instructed  their  financial 
agent  in  New  York  to  advertise  to  that  effect.  This  action 
likewise  tended  to  strengthen  the  position  of  the  anti- 
greenbackers. 

On  February  12,  1863,  resolutions  were  introduced  in  the 
Legislature,  asking  the  general  government  to  except  Cali- 
fornia from  the  operations  of  the  legal-tender 
f/interest.^^*^  law.  One  of  the  reasons  advanced  by  the 
mover  of  the  resolutions  was  that  the  rate  of 
interest  had  risen  to  double  the  customary  rate  because 
lenders  were  fearful  that  no  form  of  contract  could  prevent 
the  payment  of  greenbacks  where  gold  had  been  promised. 
Lenders  required  a  higher  rate  to  compensate  them  for  this 
risk.     The  resolutions  were,  however,  rejected. 

An  agitation  now  was  started  by  the  Daily  Herald  for  a 
law  to  enforce  the  payment  of  contracts  in  whatever  kind  of 
money  the  parties  might  agree  for.  The  Legislature  took  up 
the  subject  in  earnest,  and  in  April,  1863,  passed  a  law  to 
this  end,  not  mentioning  gold,  greenbacks,  or  any  particular 
kind  of  money  by  name.  This  was  known 
Specific  contract  ^^  ^j^^  Specific  Contract  Law.  It  provided 
merely  that  in  an  action  on  a  contract,  or 
obligation  in  writing,  payable  in  a  specified  kind  of  money 
or  currency,  the  judgment  should  be  payable  in  such  money 


THE   GREENBACKS  133 

or  currency.  The  parties  might  stipulate  for  English  sover- 
eigns, or  Spanish  doubloons,  or  notes  of  the  Bank  of  France, 
as  well  as  for  American  eagles,  or  greenbacks;  the  law 
would  enforce  the  contracts  in  all  cases.  The  act  was 
passed  upon  by  the  Supreme  Court  of  the  state  the  same 
year  and  pronounced  constitutional.     It  was   also  held  to 

be  applicable  to  contracts  made  before  its 
Sustained  by  the  passage.  Both  these  doctrines  were  subse- 
the  United  States,  quently  affirmed  by  the  Supreme  Court  of  the 

United  States,  in  terms  which  implied  that  the 
Specific  Contract  Law  was  superfluous.  In  other  words, 
specie  contracts  were  enforceable  without  it. 

It  remains  to  notice  other  decisions  of  the  Supreme  Court 
of  the  United  States  on  the  subject  of  legal-tender  notes. 

In   the   case   of  Lane   County   vs.    Oregon'^ 
DeSns^""'*       (December,  1868)  the  court  held  unanimously 

that  the  legal-tender  acts  of  1862  and  1863 
did  not  apply  to  taxes  imposed  by  the  authority  of  a  state, 
and  that  taxes  are  not  "debts."  It  followed  that  if  a  state 
made  its  taxes  payable  in  gold  the  taxpayer's  obligation 
could  not  be  discharged  with  legal-tender  notes. 

In  Branson  vs.  Rodes'^  (December,  1868)  the  court  held 

that  a  contract  specifically  payable  in  gold  and  silver  coin 

could  not  be  discharged  by  a  tender  of  United  States  notes. 

In  Butler  vs.  Horwitz^  immediately  following,  it  was  held 

that  a  contract  to  pay  a  certain  sum  in  gold  and  silver  coin 

is,  in  legal  effect,  a  contract  to  deliver  a  cer- 
Enforceabie^*^       tain  weight  of  gold  and  silver  of  a  certain 

fineness.  In  this  case  the  contract  had  been 
made  in  1791  and  was  for  payment  in  "  English  golden 
guineas."  It  was  held  in  this  case  that  damages  for  breach 
of  contract  should  be  assessed  in  coin  also. 

1  7  Wallace,  71. 

2  7  Wallace,  229. 


134  GOVERNMENT   PAPER   MONEY 

In  Hepburn  vs.  Gris7vold^  (December,  1869)  it  was  held 
by  five  judges  against  three  (the  opinion  of  the  court  being 
delivered  by  Chief  Justice  Chase)  that  the  making  of  notes, 
or  bills  of  credit,  a  legal  tender  in  payment  of  preexisting 
debts  is  not  a  means  appropriate,  plainly  adapted,  or  really 
calculated  to  carry  into  effect  any  express 
Case  ^^  ^^  power  vested  in  Congress  ;  is  inconsistent  with 
the  spirit  of  the  constitution  and  is  prohibited 
by  the  constitution.  •  Also  that  the  clause  in  the  acts  of 
1862  and  1863  which  makes  United  States  notes  a  legal 
tender  in  payment  of  all  debts,  public  and  private,  so  far  as 
it  applies  to  debts  contracted  before  the  passage  of  those 
acts,  is  unwarranted  by  the  constitution. 

The  judges  who  concurred  with  the  Chief  Justice  were 
Clifford,  Nelson,  Grier,  and  Field.  The  dissenting  judges 
were  Miller,  Swayne,  and  Davis. 

In  the  Legal  Tender  Cases'^  (December,  1870)  the  fore- 
going decision   was   reversed  by  five  judges  against  four. 
The  opinion   of  the   court  was  delivered  by 
The  Hepburn         Justice   Strong,  who  had  been   appointed  in 
Judgment  "'  r  t     ^-       r-  •  '        a       a 

reversed.  place  of  Justice  Grier,  resigned.    A  new  mem- 

ber (Bradley)  had  been  added,  in  pursuance 
of  a  law  passed  by  Congress  in  April,  1869,  raising  the 
whole  number  of  judges  to  nine.  The  opinion  read  by 
Justice  Strong  implied  that  the  power  of  Congress  to  make 
the  government's  notes  legal  tender  between  individuals  on 
preexisting  contracts  was  an  incident  and  consequence  of 
the  war  power,  but  it  did  not  expressly  say  so.  The  legal 
points  of  the  opinion  will  not  be  considered  here,  but  some 
attention  must  be  given  to  an  economical  dictum  found  in 
it,  viz.: 

It  is  hardly  correct  to  speak  of  a  standard  of  value.  The 
Cons«titution  does  not  speak  of  it.     It  contemplates  a  standard  for 

1  8  Wallace,  603.  2  12  Wallace,  457. 


THE    GREENBACKS  135 

that  which  has  gravity  or  extension,  but  value  is  an  ideal  thing. 
The  coinage  acts  fix  its  unit  as  a  dollar,  but  the  gold  or  silver 

thing  we  call  a  dollar  is  in  no  sense  a  standard  of 
Judge  Strong  on  ^  ^^jj^^.  j^  jg  ^  representative  of  it.  There 
"Value." 

might  never  have  been  a  piece  of  money  of  the 

denomination  of  a  dollar.  There  never  was  a  pound -sterling 
coined  until  1 815,  if  we  except  a  few  coins  struck  in  the  reign  of 
Henry  VIII,  almost  immediately  debased,  yet  it  has  been  the 
unit  of  British  currency  for  many  generations.  It  is  thus  a  mis- 
take to  regard  the  legal-tender  acts  as  either  fixing  a  standard  of 
value,  or  regulating  money  values,  or  making  that  money  which 
has  no  intrinsic  value. 

The  learned  judge  here  confounds  value  with  the  standard 
of  value,  and  speaks  of  both  as  having  no  concrete  existence. 
Value  is  an  ideal  thing  in  the  same  sense  that  weight  is. 
The  former  means  exchangeability ;  the  latter  means  force 
of  gravity.  A  dollar  is  a  definite  amount  of  exchangeability 
as  an  ounce  is  a  definite  amount  of  the  force  of  gravity. 
The  former  will  bring  to  its  possessor  a  given  quantity  of 
goods ;  the  latter  requires  a  given  amount  of  force  to  lift  it. 
Both  are  fitted  to  become  standards,  —  the  one  of  value  and 
the  other  of  weight,  —  and  when  made  such  by  law  they  are 
not  ideal  but  concrete  things.  The  legal-tender  act,  as  has 
been  remarked  previously,  was  a  change  of  the  definition  of 
a  term  in  common  use,  i.e.,  the  word  "dollar."  It  had  pre- 
viously meant  a  definite  amount  of  metal  of  a  specified  fine- 
ness. Under  the  new  definition  it  meant  the  government's 
promise  to  pay  this  thing  at  an  indefinite  time. 

The  five  judges  who  concurred  in  this  opinion  were 
Strong  and  Bradley  in  addition  to  the  minority  in  the 
Hepburn  case.  Separate  dissenting  opinions  were  read 
by  Chief  Justice  Chase  and  by  Judges  Clifford,  Field,  and 
Nelson. 

In  Juillard  v^.  Greenman'^  (March,  1884)  it  was  held  that 
1  no  U.  S.,  421. 


136  GOVERNMENT    PAPER   MONEY 

Congress  has  the  constitutional  power  to  make  the  Treasury 
notes  of  the  United  States  a  legal  tender  in  payment  of 
private  debts  in  time  of  peace  as  well  as  in  time  of  war. 
Also  that  legal-tender  notes  redeemed  and  reissued  under 
the  act  of  May  31,  1878,  are  a  legal  tender,  although  not 

expressly  made  so  by  that  act.  The  opinion 
Decisiorf^*  of  the  court  was  delivered  by  Justice  Gray, 

and  a  dissenting  one  was  written  by  Justice 
Field.  In  Justice  Gray's  opinion  we  find  the  following 
statement : 

The  power,  as  incident  to  the  power  of  borrowing  money  and 
issuing  bills  or  notes  of  the  government  for  money  borrowed,  of 
impressing  upon  those  bills  or  notes  the  quality  of  being  a  legal 
tender  for  the  payment  of  private  debts,  was  a  power  universally 
understood  to  belong  to  sovereignty  in  Europe  and  America  at 
the  time  of  the  framing  and  adoption  of  the  Constitution  of  the 
United  States. 

George  Bancroft,  the  historian,  reviewed  this  opinion  in 
both  its  legal  and  its  historical  aspects.     Referring  to  the 

statement  quoted  above,  he  declares  it  to  be 
CritkLm^""'"''  "  a   stupendous  error,"   and    affirms  that    no 

such  power  was  understood  to  belong  to 
sovereignty  in  Europe  at  that  time,  /.<?.,  in  1788.^ 


RECAPITULATION 

United  States  notes,  otherwise  called  greenbacks,  or  legal 
tenders,  were  issued  by  Congress  during  the  Civil  War,  to 
the  maximum  sum  of  ^450,000,000.  They  were  similar 
in    their   nature   and    consequences    to   the    Colonial    and 

1  "  The  Constitution  of  the  United  States  of  America  Wounded  in 
the  House  of  its  Guardians,"  by  George  Bancroft.     Pamphlet,  1884. 


THE   GREENBACKS  137 

Revolutionary  bills  of  credit  that  preceded  them,  but  the 
depreciation  was  not  so  great.  The  lowest  rate  reached 
by  them  was  35  cents  per  dollar  in  the  year  1864. 

The  notes  were  originally  made  convertible,  at  the  option 
of  the  holder,  into  bonds  bearing  coin  interest  at  6  per  cent. 
This  connecting  link  between  the  notes  and  gold  was 
unwisely  repealed  in  1863.  If  it  had  remained  in  force, 
the  notes  would  have  been  exchanged  for  bonds  whenever 
the  price  of  the  latter  was  above  par,  and  specie  payments 
would  probably  have  been  resumed  automatically  soon  after 
the  close  of  the  war. 

As  the  notes  were  declared  by  law  to  be  legal  tender  for 
all  debts  public  and  private,  except  duties  on  imports  and 
interest  on  United  States  bonds,  many  people  affirmed  and 
believed  that  the  principal  of  the  bonds  could  be  rightfully 
paid  with  greenbacks,  although  the  latter  were  irredeemable. 
This  misconception  led  to  a  political  controversy  of  great 
bitterness,  long  duration,  and  doubtful  issue. 

The  cost  of  the  war  was  largely  enhanced  by  the  use  of 
irredeemable  paper,  the  prices  of  arms,  ammunition,  and 
supplies  having  risen  in  consequence  of  currency  inflation. 
The  prices  of  commodities  were  relatively  higher  during 
the  suspension  of  specie  payments  than  the  premium 
on  gold.  Dealers  sought  to  protect  themselves  in  this 
way  against  loss  by  fluctuations  in  the  value  of  the 
currency. 

The  wages  of  labor  did  not  advance  pari  passu  with  the 
prices  of  commodities  during  the  war.  The  effective  pay 
of  the  soldiers  was  seriously  reduced  by  the  advance  of 
prices.  Thus  the  pecuniary  burden  of  the  war  fell  most 
heavily  upon  the  classes  least  able  to  bear  it. 

Irredeemable  currency  makes  changes  in  the  distribution 
of  property  among  individuals  and  classes.  It  works  injus- 
tice between  debtors  and  creditors  and  between  employers 


138  GOVERNMENT   PAPER   MONEY 

and  employees.  It  promotes  speculation,  introduces  the 
gambling  element  into  business,  defrauds  the  wage-earner, 
and  brings  ruin  upon  innocent  people. 

The  issuing  of  irredeemable  paper  is  sometimes  called  a 
forced  loan,  but  it  has  none  of  the  characteristics  of  a  loan. 
A  loan,  even  when  forced,  implies  an  accounting  and  repay- 
ment to  the  lender.  No  such  thing  is  promised  or  contem- 
plated when  such  paper  is  issued,  but  merely  that  somebody 
shall  be  paid  something  at  some  time.  Even  this  promise 
is  not  always  fulfilled. 

The  value  of  greenbacks  during  the  suspension  of  specie 
payments  was  recorded  during  the  business  hours  of  each 
day  by  actual  sales  and  purchases  of  gold  on  the  New  York 
Gold  Exchange.  In  1864  Congress,  attempted  to  check  the 
depreciation  of  the  currency  by  closing  the  Gold  Exchange 
and  prohibiting  sales  of  gold  or  foreign  exchange  for  future 
delivery.  The  premium  on  gold  advanced  more  rapidly 
after  the  passage  of  this  act  than  before,  and  Congress 
repealed  it  two  weeks  later. 

Gambling  in  gold  was  one  of  the  evils  of  the  time,  and 
almost  a  necessary  one  in  connection  with  the  foreign  trade 
of  the  country.  In  1869  a  scheme  was  set  on  foot  by  an 
unscrupulous  speculator  for  the  purpose  of  "cornering" 
gold,  i.e.^  buying  all  the  gold  in  the  market  and  compelling 
persons  who  had  sold  it  for  future  delivery  to  buy  it  from  him 
and  his  clique.  It  resulted  in  a  most  disastrous  panic, 
ruining  or  seriously  crippling  hundreds  of  business  men  in 
the  principal  cities  of  the  Union.  The  day  on  which  the 
catastrophe  occurred  was  afterwards  known  in  Wall  Street 
as  Black  Friday. 

United  States  notes  never  became  current  in  California 
until  after  the  resumption  of  specie  payments.  The  busi- 
ness community  declined  to  receive  them,  except  at  their 
value  in  gold.     The  Legislature  of  the  state  passed  an  act 


THE   GREENBACKS  I  39 

known  as  the  Specific  Contract  Law,  by  virtue  of  which  con- 
tracts should  be  enforceable  in  any  kind  of  money  the 
parties  should  stipulate  for.  This  law  was  upheld  by  the 
highest  courts  of  the  state  and  of  the  United  States. 

The  Supreme  Court  of  the  United  States  has  held  that 
a  contract  between  private  persons,  if  made  specifically 
payable  in  coin,  cannot  be  discharged  with^  legal-tender 
notes.  Also  (December,  1869),  that  the  legal-tender  act  of 
1862  was  unconstitutional  so  far  as  it  applied  to  debts  con- 
tracted before  its  passage.  The  last-mentioned  decision  was 
reversed  one  year  later  (December,  1870).  It  was  inferred 
from  the  language  of  the  court  in  this  decision  that  the 
power  of  Congress  to  make  the  notes  of  the  United  States 
legal  tender  between  individuals  on  preexisting  contracts 
was  an  incident  of  the  war  power.  In  March,  1884,  the 
court  held  that  Congress  has  power  to  make  the  notes  of 
the  United  States  legal  tender  in  time  of  peace  as  well  as  in 
time  of  war. 

Authorities 

Knox's  United  States  Notes. 

Spaulding's  History  of  the  Legal-  Tender  Money  issued  during 
the  Great  Rebellion. 

Newcomb's  Critical  Examination  of  our  Financial  Policy 
during  the  Southern  Rebellion. 

H.  C.  Adams'  Public  Debts. 

Mitchell's  "  Greenbacks  and  the  Cost  of  the  Civil  War,"  in  the 
Journal  of  Political  Economy^  March,  1897. 

Banker'' s  Magazine  and  Statistical  Register^  1861-65. 


CHAPTER   IV 

CONFEDERATE  CURRENCY i 

The  provisional  government  of  the  Confederate  States  of 
America  was  formed  at  Montgomery,  Ala.,  on  the  8  th  of 
February,  1861.  Its  Secretary  of  the  Treasury  was  C.  G. 
Memminger.  Its  first  financial  act  (March,  186 1)  was  the 
issue  of  $2,000,000  of  Treasury  notes  in  denominations  not 
smaller  than  $50.  They  bore  interest  at  the  rate  of  3.65 
per  cent  and  were  payable  to  order,  —  that  is,  to  some  person 
named  in  the  note  and  transferable  by  his  endorsement. 
They  were  not  intended  to  be  used  as  currency  and  were 
not  so  used.  Shortly  afterwards  the  Confederacy  borrowed 
$15,000,000  on  bonds  drawing  8  per  cent  interest,  for  which 
it  received  gold  value  during  the  year  186 1.  The  money  was 
expended  in  the  purchase  of  arms,  ammunition,  and  sup- 
plies abroad.  An  export  duty  of  4  cent  per 
First  steps.  ^  ,  ^  1    ,         1 

pound  on  cotton  was  enacted,  but  by  reason 

of  the  blockade  of  the  Southern  ports  it  yielded  scarcely 
anything.  Later  in  the  same  year,  May  16,  the  Confed- 
erate Congress  authorized  the  issue  of  $20,000,000  of  non- 
interest-bearing  Treasury  notes  of  denominations  of  $5.00 
and  $10,  redeemable  in  specie  in  two  years  and  convert- 
ible into  8  per  cent  bonds.  These  were  intended  to  cir- 
culate as  money,  and  they  became  at  once  the  currency 
of  the  Confederacy. 

1  The  principal  authority  for  the  facts  embraced  in  this  chapter  is 
Professor  J.  C.  Schwab's  The  Confederate  States  of  America,  1861-186$ 
(Charles  Scribner's  Sons,  1901). 

140 


CONFEDERATE   CURRENCY  I4I 

The  issue  of  bonds  was  increased  to  $150,000,000,  and 
it  was  sought  to  make  this,  in  part,  a  produce  loan. 
Cotton,  corn,  flour,  pork,  beef,  and  tobacco  were  to  be  taken 
in  exchange  for  bonds,  and  agents  were  appointed  to  solicit 
subscriptions  among  the  planters.  Nine-tenths  of  all  the 
subscriptions  were  in  cotton.  The  reason  why  cotton  was 
offered  so  profusely  was  that  the  Confederate  Treasury  was 
the  only  market  open  to  the  planter,  whose  customary  mar- 
ket was  cut  off  by  the  blockade.  Meanwhile  he  had  his 
own  obligations  to  meet,  and  these  could  not  be  satisfied 
with  8  per  cent  bonds  any  more  than  with  cotton   itself. 

There  was  an  outcry  in  many  quarters  for 
A  Produce  Loan . 

relief  for  the  planters.  Some  persons  advo- 
cated an  issue  of  Treasury  notes,  with  which  to  buy  all  the 
cotton  offered  for  sale.  Others  proposed  a  loan  of  such 
notes  on  the  cotton  as  security.  Either  of  these  plans,  it 
was  seen,  would  cripple  the  Confederate  finances  at  the 
■start,  by  filling  the  field  of  circulation  before  the  armies 
were  fairly  in  motion.  The  Confederate  Congress  did 
nothing  for  the  planters,  but  some  of  the  separate  legisla- 
tures voted  them  Treasury  notes  of  their  own  state  issues 
on  the  security  of  cotton,  which  was  left  in  the  hands  of  the 
planters  themselves. 

At  the  end  of  1861  there  were  $105,000,000  of  Confeder- 
ate Treasury  notes  outstanding,  and  the  premium  on  gold 
was  15  to  20  per  cent,  —  the  record  is  not  exact.  The  notes 
were  never  made  legal  tender.  The  question  of  making 
them  such  was  frequently  under  debate  in 
Legal  Tender  ^*^  Congress,  but  was  always  decided  in  the  neg- 
ative. Although  the  Confederate  Congress 
did  not,  and  Southern  state  legislatures  could  not,  make 
the  notes  legal  tender,  the  latter  bodies,  or  some  of  them, 
deprived  creditors  of  the  remedies  they  had  previously 
enjoyed  for  collecting  their  dues  in  the  courts  of  law. 


142  GOVERNMENT   PAPER   MONEY 

On  August  19,  1 86 1,  the  Confederate  Congress  author- 
ized an  issue  of  $100,000,000  of  Treasury  notes  of  denom- 
inations of  $5.00  and  upwards.  It  was  the  opinion  of  the 
Southern  bankers,  who  were  then  holding  a  convention  at 
Richmond,  that  this  might  be  .safely  done,  but  the  limit  was 
raised  to  $150,000,000  before  the  end  of  the  year.  The 
notes  were  redeemable  "  six  months  after  the  ratification  of 
a  treaty  of  peace  between  the  Confederate  States  and  the 
United  States."  They  were  convertible  into  bonds  draw- 
ing 8  per  cent  interest,  or  into  call  certificates  drawing 
6  per  cent,  the  latter  being  reconvertible  into  notes  at  the 
holder's  option. 

Internal  taxation  was  not  resorted  to  by  the  Confederacy 
in  the  first  year  of  the  war,  except  by  a  direct  tax  on  the 
states,  which  was  paid  mostly  by  issues  of  state  notes  or 

bonds,  —  that  is,  by  borrowing.    The  customs 
Failure  to  tax.  .  . 

yielded  next  to  nothing,  the  ports  being  block- 
aded. It  was  Secretary  Memminger's  opinion  at  the  outset, 
that  the  war  should  be  carried  on  by  loans,  with  just  suffi- 
cient taxation  to  pay  interest.  The  Confederate  Congress 
did  not  go  so  far  in  the  way  of  taxation  as  Secretary  Mem- 
minger  advised.  It  preferred  to  rely  on  bond  issues  and 
note  issues  altogether.  It  accordingly  passed  an  act  in 
April,  1862,  for  $165,000,000  of  8  per  cent  bonds  and 
$50,000,000  of  new  notes.  It  also  issued  another  kind  of 
note,  of  the  denomination  of  $100,  bearing  interest  at  the  rate 
of  7.30  per  cent,  receivable  for  taxes.  It  was  supposed  that 
these  would  be  held  for  investment,  but  they  were  soon 
found  to  be  in  circulation.  Prices  of  commodities  were 
rising  so  rapidly  that  the  notes  were  worth  more  in  trade 
than  in  one's  strong-box.  Only  9  per  cent  of  the  public 
expenses  was  met  with  bonds,  85  per  cent  with  notes,  and 
6  per  cent  with  taxes,  donations,  and  the  confiscation  of 
Federal  property. 


CONFEDERATE    CURRENCY  1 43 

As  early  as  September,  1862,  every  barrier  to  note  issues 
was  thrown  down  by  the  passage  of  an  act  authorizing 
issues  Hmited  only  by  the  public  expenses.  This  system 
avoided  present  trouble,  but  it  added  to  the  anxieties  of  the 
Secretary  of  the  Treasury,  who  knew  that  it  was  ruinous  in 
the  long  run.  Produce  loans  were  resorted  tq  as  a  partial 
check  to  excessive  issues  of  currency.  The  government 
thus  obtained  the  ownership  of  430,000  bales  of  cotton,  and 
was  able  to  ship  19,000  bales  to  Europe  by  blockade-run- 
ners. In  December,  1862,  the  Treasury  notes  outstanding, 
including  state  issues,  reached  $500,000,000,  and  gold  was 
worth  3  for  i. 

As  the  foregoing  methods  were  proving  fruitless,  the  idea 
was  conceived  of  making  cotton  the  basis  of  a  loan  abroad. 
After  various  negotiations  the  scheme  was  undertaken  by 
the  house  of  Erlanger  &  Co.  of  Paris.  It  was  for  ;^3,ooo,- 
000  sterling,  and  was  secured  by  cotton  in  the  Confederate 
States  at  a  valuation  of  6^.  per  pound.  Cotton  was  then 
selling  at  2\d.  per  pound  in  England.  The  payments  were 
to  be  made  in  monthly  instalments,  the  first  one  being  5  per 
cent.  The  subscription  was  opened  March  21,  1863,  at  the 
issue  price  of  90,  and  was  said  to  have  been  over-subscribed 
five  times  in  England  alone.  Yet  after  deducting  brokers' 
commissions,  interest  on  bonds,  repurchases  to  sustain 
the  market,  and  other  expenses,  the  net  amount  realized 
on  the  $15,000,000  of  bonds  was  only  $6,500,000.  The 
Confederate  cruisers  were  paid  for  out  of  the  net  amount 
received. 

At  the  beginning  of  1863  Mr.  Memminger  addressed  him- 
self to  the  task  of  getting  his  Treasury  notes  funded  into 
bonds.  He  recommended  that  a  bill  be  passed  providing 
that  notes  not  funded  before  August  i,  1863,  should  cease 
to  be  currency  and  cease  to  be  convertible.  The  Confed- 
erate Congress  passed  a  bill  with  elaborate  provisions  to 


144  GOVERNMENT    PAPER   MONEY 

carry  this  plan  into  effect.  It  contained  also  provisions  for 
issuing  new  notes  to  the  amount  of  $50,000,000  per  month. 
This  attempt  to  brand  the  old  notes  while  issuing  new  ones 

threw  the  currency  into  worse  disorders  than 
FundTng!'^  before.      The    Richmond   banks    refused    to 

receive  the  old  notes  as  deposits,  and  the 
Virginia  Legislature  ordered  that  they  should  not  be  received 
for  state  taxes.  Newspapers  denounced  the  act  of  Congress 
as  repudiation.  The  note-holders,  seeing  that  the  old  notes 
were  likely  to  become  worthless,  now  hastened  to  fund 
them,  and  actually  sent  in  $125,000,000  in  three  months  of 
1863,  but  in  these  three  months  $150,000,000  of  new  notes 
had  been  issued.  The  total  amount  outstanding  on  the 
ist  of  January,  1864,  was  upwards  of  $700,000,000,  and 
the  gold  quotation  was  20  for  i.  Only  $5,000,000  was 
raised  during  the  year  by  taxation.  The  total  debt  of  the 
Confederacy  was  now  $1,221,000,000. 

Various  schemes  of  repudiation  were  now  on  foot. 
They  took  shape  eventually  in  a  bill  (passed  February  17, 
1864),  providing  that  all  outstanding  notes  smaller  than  $5.00 
should  be  convertible  into  bonds  and  receivable  at  par  till 

the  I  St  of  July,  1864,  and  thereafter  be  taxed 

Partial  ^    £  existence  within  the  year.     Simultane- 

Repudiation.  J 

ously  another  issue  of  notes  was  authorized 

(a  sort  of  "  new  tenor,"  like  the  secondary  issues  of  colo- 
nial bills  of  credit),  for  which  the  old  notes,  except  those 
of  $100  and  upwards,  could  be  exchanged  at  the  rate  of 
$3.00  old  for  $2.00  new;  $426,000,000  were  so  exchanged. 
The  currency  had  now  become  unmanageable.  The  $100 
notes  continued  to  circulate  after  they  had  been  outlawed. 
There  was  active  funding  for  some  months  after  the  passage  of 
this  bill,  and  its  effect  was  shown  in  a  decline  of  the  gold 
quotation  from  $23  to  $17  for  $1.00;  but  when  the  new  notes 
came  out,  it  rose  again  to  $23  in  September,  and  reached 


CONFEDERATE   CURRENCY  145 

$40  before  the  end  of  the  year.  The  volume  of  currency 
was  now  fully  $1,000,000,000.  The  old  notes  and  the  new 
ones  circulated  side  by  side,  were  equally  discredited,  and 
continued  to  depreciate  together.  They  passed  in  trade  at 
the  same  rates.  The  credit  of  the  Confederate  Government 
was  now  shattered,  and  Mr.  Memminger  resigned  his  office 
in  midsummer,  1864. 

He  was  succeeded  by  George  A.  Trenholm  of  Charleston. 
The  latter  was  not  slow  to  perceive  that  compulsory  funding 
had  been  a  grave  mistake.  "Apprehensions  of  ultimate 
repudiation,"  he  wrote  to  Governor  Bonham,  "crept  like 
an  all-pervading  poison  into  the  minds  of  the  people,  and 
greatly  circumscribed  and  diminished  the  purchasing  power 
of  the  notes."  In  January,  1865,  the  gold  quotation  was 
$53  for  $1.00.  Secretary  Trenholm  proposed  to  reverse  the 
policy  of  compulsory  funding,  in  order  to  save  the  govern- 
ment's credit,  but  it  was  too  late.  A  bill  to 
Final  Collapse.  ■»,       r,^        ,     ,     ,         ,  •  «- 

carry   Mr.    Irenholms   plan   into  effect   was 

passed  by  the  House,  but  failed  in  the  Senate.  There  was 
nothing  to  do  now  but  to  make  fresh  issues  of  notes, 
although  the  previous  law  for  this  purpose  contained  a 
pledge  that  there  should  be  no  more.  In  March,  1865,  a 
bill  for  $80,000,000  of  "  new  tenor  "  was  passed  over  the 
President's  veto.  There  was  some  talk  about  heavier  taxes 
on  exports  and  imports,  although  there  were  none  to  be 
taxed.  The  last  scheme  was  for  a  specie  loan  of  $3,000,- 
000,  failing  which  there  was  to  be  a  tax  of  25  per  cent  on 
all  the  specie  in  the  Confederacy.  This  singling  out  of  one 
kind  of  property,  and  putting  on  it  a  tax  of  one-fourth  of  its 
value,  was  confiscation.  The  Richmond  banks,  which  were 
most  exposed  to  the  application  of  force,  advanced  $300,000, 
and  almost  immediately  thereafter  the  Confederacy  collapsed. 
Almost  every  blunder  that  it  was  possible  to  commit  in 
national  finance  was  committed  by  the  Confederacy,  and  on 


146  GOVERNMENT    PAPER   MONEY 

a  gigantic  scale.  The  initial  one  was  the  failure  to  tax. 
The  direct  tax  on  the  states,  as  we  have  seen,  was  largely- 
met  by  borrowing,  and  this  was  additional  to  the  Confederate 
borrowing  and  in  the  same  field.  In  1863  the  Confederate 
Congress  was  awakened  to  the  necessity  of  taxing  the 
people  by  its  own  machinery,  but  it  was  now  too  late  to  do 

so  effectively.     The   population  was  sparse, 
Fatal  Mistakes.       ,  \  .       .  ,  ,      , 

the  means  or  communication   slow,  and  the 

territory  to  be  covered  wide,  with  much  of  it  in  possession 

of  the  Union  forces.     Worst  of  all,  the  swelling  volume  of 

the  currency  inflated  the  prices  of  property  so  that  a  given 

rate   of   taxation   payable    in   dollars  yielded  a  constantly 

lessening   value.     In    order   to   overcome   this    difficulty  a 

system  of  tithing  was  enacted,  —  that  is,  a  tax  payable  in 

produce,  of  the  kinds  needed  by  the  army.     This  system 

was  grossly  unjust  to  the  farmers.     The  man  who  had  to 

pay  $100  in  currency,  and  the  one  who  had  to  contribute 

one  hundred  bushels  of  corn,  did  not  stand  on  the  same 

footing.     The  former  might  pay  in  1863  not  more  than  %\o 

in  value  measured  by  gold,  and  not  more  than  $5.00  in  1864, 

while  the  one  hundred  bushels  of  corn  contributed  by  the 

latter  remained  a  fixed,  unshrinkable  quantity.    The  farmers 

made   so   stout  a  resistance  to   the  tithing  system  that  it 

yielded  very  small  returns. 

The  next  blunder  in  Confederate  finance  was  that  of 
paying  interest  on  loans  in  irredeemable  paper.  It  must 
not  be  assumed  that  there  was  no  other  alternative.  No 
other  was  ever  tried.  It  would  have  been  time  enough  to 
fall  into  the  pit  when  it  could  not  be  avoided.  The  gov- 
ernment should  have  bought  specie  at  the  market  price  and 
paid  the  interest  on  the  bonds  with  it,  in  order  to  support 
the  public  credit. 

The  third  and  fatal  folly  of  the  Confederacy  was  the 
compulsory  funding  act.     No  casuistry  could  disguise  this 


CONFEDERATE    CURRENCY  1 47 

Step.  It  was  repudiation,  and  it  brought  its  own  speedy 
punishment.  If  military  events  had  not  brought  the  Con- 
federacy to  an  end  in  April,  1865,  it  must  have  collapsed 
financially  about  that  time.  In  other  words,  the  power  to 
supply  the  army  in  the  field  with  food,  clothing,  arms,  and 
ammunition  could  not  have  continued  much  longer.  The 
blockade  of  the  Confederacy,  of  course,  intensified  its  finan- 
cial difficulties.  Secretary  Memminger  attributed  his  failure 
to  it.  Indeed,  if  it  had  had  free  communication  with  Europe 
the  Confederacy  might  have  survived  the  errors  of  its  Treas- 
ury Department  and  the  war  might  have  had  a  different 
ending. 

The  note  issues  of  the  separate  states  are  of  importance 
in  connection  with  those  of  the  Confederacy  as  throwing 
light  on  the  course  of  a  paper  currency  unregulated  by 
redemption  in  specie  and  unrestrained  by  anything  except 
the  whims  of  legislatures.  The  "  wants  of  trade  "  in  respect 
of  money  are  never  so  imperious  as  when  governments  are 

issuing  irredeemable  notes.  Prices  of  com- 
vat?Currenc"        modities   advanced  faster   than   the   price   of 

gold.  This  was  because  dealers  made  an  extra 
charge  for  goods,  by  way  of  insurance  against  fluctuations 
in  price.  The  advance  of  prices  absorbed  the  new  currency 
and  created  an  abnormal  demand  for  more.  The  appetite, 
was  shared  by  the  state  governments,  by  cities  and  counties, 
by  banks,  by  railroad  and  other  corporations ;  and  finally 
the  right  of  issue  was  assumed  by  private  persons,  such  as 
tobacconists,  grocers,  barbers,  and  milk  dealers,  who  issued 
tickets,  which  they  gave  out  as  change  in  the  ordinary 
course  of  trade  and  promised  to  redeem  in  goods  or  ser- 
vices. Alabama  began  with  an  issue  of  $1,000,000  of  state 
notes  as  early  as  February,  186 1,  and  the  amount  was 
increased  later  to  $3,500,000.  These  were  receivable  for 
state    taxes.     Georgia   issued    $18,000,000    of   state   notes 


148  GOVERNMENT    PAPER   MONEY 

redeemable  in  Confederate  notes.  These  were  in  effect  an 
addition  of  that  sum  to  the  Confederate  currency.  Missis- 
sippi made  liberal  issues  to  relieve  the  distressed  cotton- 
planters.  All  the  states  east  of  the  Mississippi  River  issued 
notes.  The  city  of  Richmond  issued  scrip  in  denominations 
from  25  cents  to  $2.00.  Charleston,  Pensacola,  Augusta,  and 
other  cities  followed  suit.  Georgia  granted  "  banking  privi- 
leges," which  meant  the  right  to  issue  notes,  to  two  railroad 
companies.  Factories,  turnpike  companies,  insurance  com- 
panies, and  others  assumed  this  right  either  with  or  without 
legislative  authority.  Money  was  as  nearly  equal  to  the 
wants  of  trade  as  the  printing  press  could  make  it.  The 
state  legislatures  at  last  attempted  to  prevent  the  circu- 
lation of  personal  and  corporate  notes,  but  the  evil  had 
grown  beyond  their  reach.  Virginia  passed  three  acts  for 
this  purpose,  but  they  could  not  be  enforced.  People  con- 
sidered these  private  notes  as  good  as  the  public  ones 
(as  they  were),  and  so  continued  to  accept  them.  The 
banks  issued  their  own  notes  freely,  since  they  were  not 
obliged  to  redeem  them,  suspension  having  been  legalized 
in  all  the  states. 


RECAPITULATION 

For  the  means  of  meeting  the  expenses  of  the  Civil  War 
the  Confederate  States  of  America  relied  almost  wholly 
on  Treasury  notes,  which  served  as  the  currency  of  the 
people.  Those  notes  were  not  made  legal  tender  by  legis- 
lative authority,  but  were  made  practically  so  by  public 
opinion  and  by  the  repeal  of  state  laws  for  the  collection 
of  debts.  Their  course  was  similar  to  that  of  the  Revo- 
lutionary bills  of  credit.  They  became  nearly  worthless 
before  the  close  of  the  war,  and  were  repudiated  in  part 
by  the  Confederate  government  and  were  superseded  by 


CONFEDERATE   CURRENCY  149 

another  batch,  a  sort  of  "new  tenor,"  which  pursued  the 
same  downward  career. 

Secretary  Memminger  said  that  it  was  impossible  to  carry 
on  war  by  means  of  taxes  alone.  This  was  a  mistake. 
Except  money  borrowed  abroad,  every  country  pays  the 
cost  of  a  war  at  the  time  of  the  war.  The  Southern  Con- 
federacy presents  an  easy  illustration  of  this  maxim,  because 
it  was  for  the  most  part  isolated,  having  little  communication 
with  the  outer  world,  and  because  all  of  its  debts  were  oblit- 
erated at  the  end  of  the  war.  Obviously  somebody  paid  the 
cost.  It  was  not  paid  by  foreigners  (except  the  trifling  sum 
borrowed  in  Europe),  nor  did  it  fall  from  the  moon.  There 
being  nobody  else  to  pay  it,  the  people  of  the  Confederacy 
must  have  paid  it,  and  must  have  paid  it  during  the  time  of 
the  war,  and  not  a  moment  later.  To  levy  taxes  sufficient 
to  pay  the  whole  of  each  year's  expenses  within  the  year 
would  not  have  made  the  burden  any  greater  than  it  actu- 
ally was.  The  Confederacy,  by  assuming  that  taxes  to  pay 
interest  on  money  borrowed  would  be  sufficient,  did  not  get 
rid  of  heavier  ones.     It  only  levied  them  in  a  different  way. 

Authorities 

Schwab's  The  Confederate  States  of  America^  1861-1863- 
Capers'  Life  of  C.  G.  Mem7ninger. 
Pollard's  Southern  History  of  the  War. 

E.  A.  Smith's  History  of  the  Confederate  Treasury^  in  Publi- 
cations of  the  Southern  History  Association  (Washington,  1901). 
Statutes  of  the  Confederate  States. 


CHAPTER   V 
AFTER   THE  WAR 

The  money  circulating  among  the  people  is  a  powerful 

educator.     It   teaches   either   truth    or  false- 

EducTtor.^''         hood.     Sometimes    the    results   of    its   false 

teachings  are  merely  whimsical  ;  more  often 

they  are  disastrous. 

We  have  seen  in  a  previous  chapter  that  after  the  forma- 
tion of  the  Latin  Monetary  Union  a  million  and  a  half  of 
silver  francs,  of  the  coinage  of  the  Papal  States,  rushed  into 
France  with  those  of  Italy  proper,  although  the  Papal  gov- 
ernment was  not  a  member  of  the  Union.  These  coins  bore 
the  effigy  of  Pope  Pius  IX,  They  gradually  found  their 
way  into  the  pockets  of  the  least  intelligent  members  of  the 
community.  In  1875  there  was  a  loss  of  two  sous  on  each 
of  these  Roman  francs,  and  in  some  parts  of  France  the 
Roman  Catholic  priests  lost  their  influence  with  the  peas- 
ants in  consequence.^  The  latter  put  the  blame  of  their 
loss  on  the  Pope  and  on  the  priests  as  agents  of  the  Pope. 
One  of  the  consequences  of  this  delusion  was  that  all  can- 
didates for  the  Chamber  of  Deputies  who  were  supported  by 
the  priests  were  defeated  by  the  votes  of  the  peasants.  It 
was  useless  to  say  to  these  people  that  they  ought  not  to 
have  accepted  the  Roman  coins,  that  the  Papal  States  were 
not  members  of  the  Monetary  Union,  and  that  neither  the 
Pope  nor  the  priests  were  to  blame.     The  people  could  not 

1  Round  my  House ;  Life  in  France  in  Peace  and  War,  by  Philip 
Gilbert  Hamerton,  p.  214. 

150 


AFTER   THE    WAR  151 

understand  such  things.  The  only  facts  they  could  grasp 
were  the  Pope's  effigy  on  the  coins  and  the  loss  of  the  two 
sous. 

Our  legal-tender  act  taught  people  false  notions.  First, 
it  led  large  numbers  of  unreflecting  persons  to  believe  that 
the  government  can  make  money.  If  the  government  can 
do  so,  people  argued  that  it  ought  to  make  money  plentiful. 
The  legal-tender  act  led  to  the  belief  also  that  the  govern- 
ment's bonds  were  payable  in  greenbacks.  The  act  said 
that  the  notes  should  be  lawful  money  and  a  legal  tender 
for  all  debts,  public  and  private,  within  the  United  States 
except  duties  on  imports  and  interest  on  government  bonds. 
These  words  printed  on  the  greenbacks  led 
InflrSacks.  multitudes  of  people  to  think  that  the  govern- 
ment could  rightfully  pay  the  first  piece  of 
paper  with  a  second  one.  If  it  could  do  so,  it  could  pay 
the  second  with  the  first.  Thus,  by  swapping  one  for  the 
other,  the  whole  debt  might  be  paid  without  taxation.  As 
all  other  governments  could  do  what  we  could,  all  national 
debts  might  be  settled  in  a  twinkling.  But  there  would  be 
no  need  of  taking  the  trouble  to  exchange  an  interest-bear- 
ing bond  for  a  non-interest-bearing  note.  The  whole  debt 
could  be  canceled  by  simply  passing  a  law  saying,  "  All 
bonds  of  the  United  States  are  legal  tender  and  shall  cease 
to  bear  interest  after  the  passage  of  this  act." 

The  policy  of  paying  the  5-20  bonds  in  greenbacks  was 
advocated  by  General  Butler  in  the  Republican  party,  and 
by  George  H.  Pendleton  in  the  Democratic,  immediately 
after  the  close  of  the  war.  Both  of  them  were  defeated  in 
their  respective  national  conventions  in  1868,  but  in  differ- 
ent ways.  The  Republican  Convention  discountenanced  in 
its  platform  the  payment  of  the  bonds  in  greenbacks.  The 
Democratic  Convention  favored  it,  but  rejected  Mr.  Pen- 
dleton as  a  candidate  for  the  presidency,  and  nominated 


152  GOVERNMENT    PAPER   MONEY 

Horatio  Seymour,  who  was  strongly  opposed  to  that  policy. 
The  Republicans  carried  the  election,  and  soon  thereafter 
(March  18,  1869)  Congress  passed  an  act  declaring  that  all 
government  obligations  were  payable  in  coin  unless  the  law 
under  which  they  were  issued  expressly  provided  for  some 
other  payment. 

This  did  not  put  an  end  to  the  controversy,  however. 
The  fight  was  long  and  bitter.  If  the  question  of  paying 
the  bonds  with  greenbacks  had  been  referred  to  popular 
vote  at  any  time  between  the  end  of  the  war  and  the  resump- 
tion of  specie  payments,  the  result  would  have  been  very 
doubtful. 

In  his  annual  report,  December,  1865,  the  Secretary  of 
the  Treasury,  Mr.  Hugh  McCulloch,  recommended  the 
policy  of  contracting  the  currency  with  a  view  to  the  early 
resumption  of  specie  payments.  The  House  of  Representa- 
tives, on  the  1 8th  day  of  that  month,  by  a  vote  of  144  to  6, 
adopted  a  resolution  "  cordially  concurring  "  in  the  recom- 
mendation. An  act  to  carry  that  policy  into 
,  fr?otfon'ad°op"ted.  effect  was  passed  April  12,  1866.  It  au- 
\  thorized  the  Secretary  to  sell  bonds  for  the 

purpose  of  "retiring  Treasury  notes  or  other  obligations 
issued  under  any  act  of  Congress,  .  .  .provided  that,  of  the 
United  States  notes,  not  more  than  ^10,000,000  may  be 
retired  and  canceled  within  six  months  from  the  passage 
of  this  act,  and  thereafter  not  more  than  $4,000,000  in  any 
one  month." 

In  February,  1868,  Congress  suspended  the  reduction  of 
the  currency  under  the  foregoing  act.     The  act  thus  repealed 

had  been  in  force  twenty-one  months,  and 
Repealed.  .      ,  11111 

44,000,000  of  the  greenbacks  had  been  re- 
tired, but  the  Secretary  had  not  exercised  his  full  powers 
under  it.  The  amount  outstanding  when  the  cancellation 
was  suspended  was  $356,000,000. 


AFTER  THE   WAR  1 53 

In   1870  and   187 1   the  Secretary  of  the  Treasury,   Mr. 
George  S.  Boutwell,  issued  $6,000,000  of  legal-tender  notes 
in  lieu  of  those  retired  by  his  predecessor,  Mr.  McCulloch, 
showing   that,  according  to   his   view,  those 
wTssue^^^  notes  were  still  legally  in  existence,  although 

they  had  been  actually  withdrawn  and  can- 
celed. The  Senate  Committee  on  Finance  made  a  report 
upon  this  action,  holding  that  the  Secretary  had  no  power  to 
issue  notes  for  any  portion  of  those  retired  under  the  act  of 
1866.  Although  Congress  took  no  action  on  the  report. 
Secretary  Boutwell  retired  a  large  part  of  the  reissued  notes, 
and  his  successor,  Mr.  Richardson,  retired  the  remainder. 
Soon  afterward.  Secretary  Richardson  himself  reissued 
$26,000,000  of  the  retired  notes  in  a  vain  attempt  to  check 
the  financial  panic  of  1873,  thus  bringing  the  whole  amount 
up  to  $382,000,000. 

In  February,  1874,  the  Senate  Committee  on  Finance 
reported  a  bill,  the  first  section  of  which  fixed  the  maximum 
amount  of  United  States  notes  at  $382,000,000,  and  the  sec- 
ond section  provided  that,  on  the  ist  of  January,  1876,  the 
Secretary  of  the  Treasury  should  either  exchange  gold  coin 
at  par  for  United  States  notes,  or  give  5  per  cent  bonds 
for  them  on  the  demand  of  any  holder  of  the 
inflation  Bill  ^^^^^^  ^j^^  ^jU  ^^^  amended  in  the  Senate 
01  1074. 

by  inserting  $400,000,000  instead  of    $382,- 

000,000  and  by  striking  out  the  second  section  altogether. 
This  was  known  as  the  Inflation  Bill,  as  it  sanctioned  the 
policy  of  adding  to  the  volume  of  an  irredeemable  currency 

in  time  of  peace.  It  passed  both  houses,  but 
Pres^^nf  Grant     ^^^  vetoed  by  President  Grant,  who  thereby 

rendered  the  country  a  great  service.  Yet  he 
intended  at  one  time  to  sign  the  bill  and  had  written  a  paper 
to  accompany  his  approval  of  it.       Congress  then  hurriedly 


154  GOVERNMENT    PAPER   MONEY 

passed  another  bill  fixing  the  maximum  amount  of  legal- 
tender  notes  at  ^^382, 000,000,  which  was  signed  by  the 
President  June  22. 

The  Inflation  Bill  having  been  a  Republican  measure  and 
vetoed  by  a  Republican  President,  the  party  was  left  in  a 
position  of  great  embarrassment,  and  was  badly  beaten  in 
the  congressional  elections  of  that  year.  It  could  neither 
inflate  nor  stand  still.  The  only  other  course  was  to  take 
steps  for  resuming  specie  payments.  It  improved  the  few 
remaining  weeks  of  its  power  to  pass  a  bill  for  this  purpose. 
The  bill  was  reported  from  the  Committee  on  Finance  by 
Senator  Sherman,  December  21,  1874,  and  passed  the  fol- 
lowing day  without  any  change.  It  first  removed  certain 
restrictions  upon    the   circulation  of  national 

Sn'AcforiSs"  ^^""^^  ^"^  provided  that  the  Secretary  of  the 
Treasury  should  "  redeem  "  greenbacks  to  the 
amount  of  80  per  cent  of  the  new  bank  notes  issued,  until 
the  total  volume,  which  was  then  $382,000,000,  should  be 
reduced  to  $300,000,000.  It  provided  that  the  Secretary 
should,  "on  and  after  January  i,  1879,  redeem  in  coin  the 
United  States  legal-tender  notes  then  outstanding,  on  their 
presentation  for  redemption  at  the  ofiice  of  the  assistant 
treasurer  of  the  United  States  in  the  city  of  New  York,  in 
sums  of  not  less  than  fifty  dollars."  The  selling  of  bonds 
to  provide  means  for  redemption  was  authorized  without 
limit  as  to  amount. 

The  word  "redeem"  was  used  in  the  act  in  two  places 
without  any  definition  of  its  meaning.  Ordinarily  the 
redemption  of  a  promissory  note  means  paying  and  cancel- 
ing it,  and  this  was  the  necessary  meaning  of 
Meaning^  *^  ^*^  the  word  in  the  place  where  it  was  first  em- 
ployed. It  meant  that  the  volume  of  green- 
backs should  be  reduced  to  $300,000,000  by  retiring  and 
canceling  the  excess  over  that  sum,  for  if  the  excess  were 


AFTER   THE   WAR  155 

not  canceled  the  reduction  could  not  take  place.  The  true 
meaning  of  the  word  having  been  determined  in  one  part  of 
the  act,  its  use  in  another  part  would  have  been  clear  and 
binding  upon  all  courts  of  law;  but  Senator  Sherman,  when 
asked  whether  the  greenbacks  which  should  be  redeemed 
would  be  put  out  of  existence,  refused  to  answer  the  ques- 
tion. The  bill  passed  both  houses  without  any  explanation 
on  this  point,  and  became  a  law  January  14,  1875. 

All  doubts  were  resolved  by  Congress  itself  three  years 
later.  October  31,  1877,  the  House  Committee  on  Banking 
and  Currency  reported  a  bill  to  repeal  the  specie  resumption 
act,  and  this  was  passed  by  the  House  November  23,  by  a 
vote  of  133  to  120.  At  this  time  the  Democrats  had  a 
majority  of  twenty  in  the  House.  The  Senate  was  composed 
of  thirty-eight  Republicans,  thirty-seven  Democrats,  and  one 
Independent  (Davis,  of  Illinois),  who  usually  voted  with  the 
Democrats  on  financial  measures.  The  Senate 
fe**eai^r*°  rejected  this   measure  by  a   majority  of  one 

vote  only.  April  29  the  House  passed  a 
bill,  177  to  35,  without  debate,  forbidding  the  retiring  or 
canceling  of  any  more  legal-tender  notes  and  providing  that 
any  thereafter  redeemed  should  be  reissued,  paid  out,  and 
kept  in  circulation.  This  bill  was  concurred  in  by  the 
Senate,  41  to  18.  Before  its  passage  Senator  Bayard  offered 
an  amendment  that  notes  once  redeemed  should  not  there- 
after be  legal  tender  between  individuals,  but  this  was 
rejected,  18  to  42.  This  measure  became  a  law  May  31, 
1878.  At  that  time  the  volume  of  greenbacks  outstanding 
was  $346,681,016,  at  which  it  still  remains. 

The  passage  of  the  specie  resumption  act  was  followed 
by  a  battle  at  the  polls  the  following  year.  The  center  of 
this  engagement  was  in  the  state  of  Ohio,  where  the  Demo- 
crats had  declared  in  their  platform  that  the  amount  of 
money  ought  to  be  made  "equal  to  the  wants  of  trade." 


156  '  GOVERNMENT   PAPER   MONEY 

This  sophism  was  slain  by  Carl  Schurz  in  a  speech  at  Cin- 
cinnati, which  decided  the  campaign.     The  phrase  "  equal 

to  the  wants  of  trade  "  means  the  wants  of  any- 
Campaign  of         body  in  trade.    It  also  requires  measures  to  put 

the  person  in  possession  of  what  he  wants. 
Since  all  must  be  treated  alike,  it  follows  that  everybody 
must  be  served  with  greenbacks  at  the  public  treasury  till 
he  says  he  has  enough.  To  give  everybody  all  the  green- 
backs he  wants  would  give  nobody  an  advantage,  except  by 
canceling  past  debts.  Therefore  an  act  of  Congress  can- 
celing all  debts  would  accomplish  the  same  end  more 
expeditiously. 

The  immediate  result  of  the  voting  in  Ohio  in  1875  was 
the  election  of  Rutherford  B.  Hayes  as  governor.  A  sec- 
ondary result  was  his  elevation  to  the  presidency  the  follow- 
ing year.  He  appointed  John  Sherman  Secretary  of  the 
Treasury.  During  1877  and  the  following  year  Mr.  Sher- 
man was  engaged  in  refunding  the  national  debt  in  pursu- 
ance of  the  act  of  July  14,  1870.  In  connection  with  this 
negotiation  he  arranged  with  a  banking  syndicate  for  the 
sale  of  new  bonds  under  the  resumption  act,  by  which  he 
was  to  receive  gold  coin  at  the  rate  of  $5,000,000  per  month. 
Before  the  31st  of  December,  1878,  he  had  accumulated 
$95,500,000    in    this    way,   and    the    Treasury   held    about 

$20,000,000  additional  derived  from  customs 

fccoXHshed.  ^"t^^s-  ^^^^  1^^'  ^^^  prescribed  no  plan  of 
resumption.  Everything  had  been  left  to  the 
Secretary's  discretion  and  to  the  chapter  of  accidents.  This 
laxity  of  Congress  was  due  in  part  to  a  general  disbelief 
that  resumption  would  or  could  be  accomplished  under  that 
act.  When  the  time  approached  and  the  decline  of  the  gold 
premium  betokened  a  strong  probability  that  the  law  would 
be  carried  into  effect,  the  agitation  in  both  political  and 
financial  circles  was  extreme.     On  the  17  th  of  December 


AFTER  THE   WAR  157 

the  premium  on  gold  disappeared  quietly  and  the  Gold 
Exchange  was  closed  because  there  was  nothing  for  its 
members  to  do.  On  the  ist  of  January,  1879,  ^^^  Treasury 
offered  to  redeem  its  legal-tender  notes,  but  none  were  pre- 
sented for  that  purpose.  The  banks  of  the  large  cities  had 
previously  kept  two  kinds  of  accounts  with  such  of  their 
customers  as  desired  them,  one  in  paper  and  one  in  gold. 
They  now  discontinued  this  practice  and  kept  accounts  only 
in  "dollars."  Therefore  nobody  had  any  motive  to  draw 
gold  from  the  Treasury  to  deposit  in  banks. 

The  chapter  of  accidents   did  more  than  anybody  had 
anticipated.     The  year  1879  proved  to  be  the  most  remark- 
able  in   our  history  in   a  commercial   sense. 
^o°^^^"'/°oo''''      The  crops  of  wheat,  corn,  and  cotton  were 

1879  and  1880.  ^  '  ' 

unexampled  in  magnitude  and  excellence, 
while  those  of  the  Old  World  were  extremely  deficient.  The 
balance  of  trade  turned  in  our  favor  suddenly  and  strongly. 
This  condition  of  things  was  repeated  on  a  somewhat 
smaller  scale  in  the  harvests  of  1880.  The  two  years  wit- 
nessed importations  of  gold  to  the  amount  of  $175,000,000, 
putting  the  immediate  success  of  specie  resumption  beyond 
peradventure. 

No  reserve  for  maintaining  specie  payments  had  been 
fixed  in  the  law  nor  was  the  need  of  any  reserve  recognized 
until  1882,  when  the  subject  was  brought  to  the  attention 

of  the  Senate  in  an  incidental  way.     A  bill 

The  $100,000,000  amend  the  National  Bank  Act  was  under 

Reserve. 

consideration.  A  section  relating  to  gold  cer- 
tificates of  deposit  was  embraced  in  it.-^  On  the  21st  of 
June,  in  that  year.  Senator  Aldrich  moved  an  amendment 

1  The  issue  of  gold  certificates  had  been  authorized  by  Section  5  of 
the  act  of  March  3,  1863,  in  these  terms  :  "  That  the  Secretary  of  the 
Treasury  is  hereby  authorized  to  receive  deposits  of  gold  coin  and  bullion 
with  the  Treasurer  or  any  assistant  treasurer  of  the  United  States,  in 


158  GOVERNMENT    PAPER   MONEY 

to  it  by  providing  that  the  Secretary  of  the  Treasury  might, 
in  his  discretion,  suspend  the  issue  of  such  certificates 
whenever  the  amount  of  gold  in  the  Treasury  available  for 
the  redemption  of  United  States  notes  should  fall  below 
$100,000,000. 

The  object  of  the  amendment  was  to  prevent  the  holders 
of  greenbacks  from  drawing  gold  from  the  Treasury,  rede- 
positing  it  there,  and  taking  gold  certificates  for  it,  all  at 
one  operation,  thus  perhaps  possessing  themselves  of  all  the 
gold  in  the  Treasury  and  at  the  same  time  using  the  govern- 
ment's vaults  as  a  free  safe  depository.  Senator  Allison 
remarked,  while  this  amendment  was  under  consideration, 
that  "  thus  far  there  has  been  no  absolute  definition  of  what 
the  reserve  fund  should  amount  to."  In  order  to  supply 
such  a  definition.  Senator  Ingalls  moved  to  amend  the 
amendment,  making  it  read  as  follows : 

Provided^  that  the  Secretary  of  the  Treasury  shall  suspend  the 
issue  of  such  gold  certificates  whenever  the  amount  of  gold  coin 
and  gold  bullion  in  the  Treasury  reserved  for  the  redemption  of 
United  States  notes  falls  below  one  hundred  millions  of  dollars. 

In  this  form  it  became  a  law,  July  12,  1882,  and  thus  a 
reserve  of  $100,000,000  gold  in  the  Treasury  for  the  redemp- 
tion of  United  States  notes  was  recognized  as  existing, 
although  not  established  by  affirmative  legislation.  It  cre- 
ated in  men's  minds  the  habit  of  considering  the  greenbacks 
as  redeemable  in  gold  at  the  option  of  the  holder,  although 
they  were  legally  redeemable  in  gold  or  silver  at  the  option 
of  the  government. 

sums  not  less  than  $20  and  to  issue  certificates  therefor  in  denomina- 
tions not  less  than  $20  each,  corresponding  with  the  denominations  of 
United  States  notes.  The  coin  and  bullion  deposited  for,  or  represent- 
ing, the  certificates  of  deposit  shall  be  retained  in  the  Treasury  for  the 
payment  of  the  same  on  demand." 


AFTER   THE    WAR  1 59 

On  July  14,  1890,  Congress  passed  an  act  for  the  issue  of^ 

an  indefinite  amount  of  legal-tender  notes  for  the  purchase 

of  silver  bullion.     This  is  commonly  called  the   Sherman    \ 

Act.     It  was  a  part  of  the  silver  legislation  treated  in  the 

following  chapter.^  The  notes  were  to  be 
The  Sherman  Act.        ,  ,  ,  1    •..-,,.  , 

redeemed  on  demand  in  "coin,     either  gold 

or  silver,  at  the  discretion  of  the  Secretary  of  the  Treasury, 
but  it  was  declared  in  the  words  of  the  act  to  be  "the 
established  policy  of  the  United  States  to  maintain  the  two 
metals  on  a  parity  with  each  other  upon  the  present  legal 
ratio  or  such  ratio  as  may  be  established  by  law."  This  was 
a  hint  rather  than  a  command  to  the  Secretary  in  favor  of 
gold  redemption.  The  notes  were  declared  in  the  act  to  be 
"  legal  tender  in  payment  of  all  debts,  public  and  private, 
except  where  otherwise  expressly  stipulated  in  the  con- 
tract." In  practical  effect  this  was  a  fresh  issue  of  green- 
backs in  time  of  peace,  and  of  unlimited  amount.  The  only 
restriction  in  the  law  was  as  to  the  rate  of  issue,  which  was 
to  be  the  sum  necessary  to  pay  for  4,500,000  ounces  of 
silver  bullion  each  month  at  the  market  price.  Nearly 
$156,000,000  of  these  notes  were  issued.  A  financial 
panic  of  great  severity  ensued,  and  the  act  was  repealed 
November  i,  1893. 

The  act  of  1890  was  not  grounded  upon  financial  consid-\ 
erations.  It  was  part  of  a  political  trade.  In  the  Senate,! 
April  29,   1896,   Senator  Teller  of  Colorado  gave  what  he 

called  the  "  unvarnished  history  "  of  the  Sher- 
miis  in  isj.^"^    man  Act,  which  has  never  been  contradicted. 

He  said  that  the  Republicans  desired  to  pass 
the  McKinley  tariff  bill.  The  silver  men  desired  to  pass  a 
free-coinage  bill.     The  latter  had  a  majority  in  the  Senate, 

1  The  Sherman  Act  of  1890  is  introduced  here  for  the  purpose  of 
presenting  all  the  legislation  respecting  legal-tender  notes  in  consecutive 
order. 


l6o  GOVERNMENT   PAPER   MONEY 

with  power  to  adopt  a  free-coinage  clause  as  an  amend- 
ment to  the  tariff  bill  and  thus  compel  the  House  to  adopt 
it  or  lose  the  latter  bill  altogether.  They  did  not  follow 
that  plan  because  they  knew  that  President  Harrison  would 
veto  a  free-coinage  bill,  even  if,  in  doing  this,  he  should  kill 
the  tariff  bill.  So  the  silver  senators  determined  to  adopt, 
not  a  free-coinage  measure,  which  would  certainly  be  vetoed, 
but  the  nearest  possible  approach  to  it,  and  put  this  meas- 
ure on  its  passage  ahead  of  the  tariff  bill.  This  was  done, 
as  the  following  legislative  record  shows  : 

May  17,  1890.     The  McKinley  tariff  bill  passed  the  House. 
June  5.     Mr.    McKinley   moved   in    the    House    to  take  up  the 

Windom  silver  bill,  which  was    amended  by  adopting    the 

Conger  substitute,  and  passed  June  7,  by  135  to  119. 
June  17.     The  Senate  took  up  the  House  silver  bill,  amended  it 

by  adopting  the  Plumb  substitute  (a  free-coinage  measure), 

and  passed  it  by  42  to  25. 
June  25.     The  House  took  up  the  silver  bill,  non-concurred  in  the 

Senate  amendment  and  asked  a  conference. 
July  7.     The  Conference  committee  reported  the   Sherman  bill, 

which  was  adopted  by  the  House  on  that  day  and  by  the 

Senate  July  10. 
July  14.     The  Sherman  silver  bill  was  approved  by  the  President. 
July  25.     The  McKinley  tariff  bill  was  taken  up  by  the  Senate 

and  passed  September  1 1 . 

Thus  the  Sherman  silver  bill  was  passed  by  the  Repub- 
licans as  the  price  of  the  McKinley  tariff.  Mr.  McKinley 
himself  was  an  ardent  advocate  of  the  former  measure. 
*'Vote  against  this  bill,"  he  said  (June  7,  1890),  "and  in 
my  judgment  you  vote  that  there  shall  be  no  legislation  on 
the  silver  question  at  this  session  of  Congress.  That  is 
what  I  fear  it  means.  We  know  we  cannot  have  free 
coinage  now  except  in  the  manner  as  provided  in  this 
bilL" 


AFTER  THE   WAR  l6l 

The  McKinley  tariff  bill  repealed  the  duties  on  sugar  and 
molasses,  which  had  yielded  $55,000,000  of  revenue  in  the 
fiscal  year  1890,  and  the  Sherman  silver  bill  added  about 
$50,000,000  per  year  to  the  public  expenses  for  the  purchase 
of  silver  bullion.  These  two  measures  exactly  canceled  the 
surplus  revenue  ($105,000,000)  of  the  year  1890,  and  a  new 
pension  bill  added  $50,000,000  more  to  the  expenditures  in 
1893,  when  it  came  into  full  operation.  Thus 
Sficiit^*^^^  the  ingredients  of  a  witch's  cauldron,  in  the 
shape  of  a  Treasury  deficit  and  a  financial 
panic,  were  collected  for  President  Cleveland's  second 
administration. 

That  the  country  had  a  sufficiency  of  instruments  of 
exchange  in  the  summer  of  1890,  before  the  Sherman  Act 
was  passed,  is  proved  by  the  fact  that  we  exported  about  as 
many  gold  dollars  as  we  obtained  of  new  paper  ones  while 
the  act  was  in  operation.  The  output  of  new  legal-tender 
notes  to  July  i,  1893,  was  $140,661,694,  and  the  net  export 
of  gold  during  the  same  time  was  $141,017,158.  This  coin- 
cidence was  not  accidental.  Whenever  there  is  an  excess  of 
instruments  of  exchange  forced  into  circulation  by  their  legal- 
tender  faculty,  one  of  two  things  will  happen.  If  they  are 
redeemable  in  gold,  there  will  be  an  outflow  of  that  metal. 

If  not  redeemable,  there  will  be  a  depreciation 
Gold  Exports. 

of  the  whole  mass.    The  great  exportation  of 

gold  in  the  years  following  the  passage  of  the  Sherman  Act 

is  thus  easily  accounted  for,  but  it  was  stimulated  by  the 

alarm  of  investors  lest  specie  payments  should  be  suspended. 

On  March  14, 1900,  Congress  passed  "  an  act  to  define  and 

fix  the  standard  of  value,  to  maintain  the  parity  of  all  forms 

of  money  issued  or  coined  by  the  United  States,  to  refund 

the  public  debt,  and  for  other  purposes."    This  is  commonly 

but  mistakenly  called  "  TheGold  Standard  Act,"  whereas  the 

gold  standard  was  established  by  the  act  of  February  12, 1873. 


l62  GOVERNMENT    PAPER   MONEY 

The  act  of  1900  reaffirmed  the  earlier  act,  but  it  also 
contained  important  specific  provisions  for  maintaining  the 
gold  standard.  It  provided  in  direct  terms 
^A^gS!''^"''^^*'*  that  all  the  legal-tender  notes  should  be  re- 
deemed in  gold  coin  on  demand  and  that  a 
reserve  of  $150,000,000  of  gold  coin  and  bullion  should  be 
kept  in  the  Treasury  for  this  purpose  solely;  that  notes 
redeemed  out  of  this  fund  should  not  be  reissued  except  in 
exchange  for  gold  ;  that  if  the  fund  should  at  any  time  fall 
below  $100,000,000,  it  should  be  restored  to  the  maximum 
sum  of  $150,000,000  by  the  sale  of  bonds,  and  that  none  of 
the  proceeds  of  such  sales  of  bonds  should  be  used  to  meet 
deficiencies  of  the  current  revenues. 

It  was  also  provided  that  there  should  be  a  complete  sep- 
aration of  the  currency  functions  of  the  Treas- 
anrRedemptf^^^^^^  "^y  ^^^"^  '^^  ^^cal  operations.  Bureaus,  or 
divisions,  of  issue  and  redemption  were  estab- 
lished in  the  Department,  to  which  were  transferred  all  the 
funds  held  for  the  redemption  of  greenbacks,  Treasury 
notes,  gold  certificates,  silver  certificates,  and  currency  cer- 
tificates. These  were  to  be  held  as  trust  funds  exclusively, 
and  were  not  to  be  mixed  with  the  ordinary  receipts  and 
disbursements  of  the  government.  The  need  of  this  pro- 
vision had  been  demonstrated  by  the  events  of  President 
Cleveland's  second  term  (1893-97),  when  the  deficiencies 
of  revenue  amounted  in  the  aggregate  to  $155,000,000, 
forcing  the  Secretary  of  the  Treasury  to  draw 
Chlin.-''^^^'^  upon  the  gold  reserve  to  meet  the  current 
expenses  of  the  government.  This  phenome- 
non was  designated  in  common  parlance  the  "  endless 
chain."  The  phrase  was  a  misnomer.  It  implied  that 
there  was  something  in  the  nature  of  the  greenback  pecul- 
iarly adapted  to  the  purpose  of  pumping  gold  out  of  the 
Treasury  indefinitely.     In  practice,  the  holders  of  the  notes 


AFTER   THE   WAR  1 63 

presented  them  at  the  Treasury  for  redemption.  After 
redeeming  them  the  Secretary  paid  them  out  again,  for  lack 
of  other  money.  Then  they  were  presented  for  redemption 
a  second  time,  and  so  on.  But  if  the  Secretary  had  had  a 
surplus  of  daily  receipts  over  daily  expenses,  the  same  green- 
backs could  not  have  been  presented  for  redemption  twice 
without  his  consent.  Hence  the  "  endless  chain  "  could  not 
have  existed.  Under  the  act  of  1900^  which  separates  the 
currency  function  from  the  other  operations  of  the  Treasury, 
no  such  trouble  can  arise.  Shortage  of  revenue  cannot  viti- 
ate the  money  in  the  pockets  of  the  people  and  need  not 
disturb  their  equanimity.  Thus  the  act  of  1900  does  much 
to  maintain  the  gold  standard  which  had  been  established 
by  law  twenty-seven  years  earlier. 

The  Treasury  notes  of  1890  are  now  in  course  of  retire- 
ment. In  the  war-revenue  act  of  June  13,  1898,  the 
Secretary  of  the  Treasury  was  directed  to  coin  the  silver 
bullion  bought  under  the  act  of  1890  into  silver  dollars  at 
the  rate  of  not  less  than  $1,500,000  per  month.  The  act  of 
1900  provided  that,  as  they  were  coined,  an  equal  amount 
of  the  Treasury  notes  which  had  been  issued  to  pay  for  the 
bullion  should  be  canceled  as  fast  as  they  should  come 
into  the  possession  of  the  government,  and  that  silver  cer- 
tificates should  be  issued  in  place  of  them. 

JoTeTeTir^r'  ^^^  ^^^^^  °^  ^^^^  measure  will  be  to  lessen  the 
direct  liabilities  of  the  gold  reserve  by  the 
sum  of  $156,000,000  and  to  add  that  amount  to  the  silver 
currency,  plus  $62,000,000  derived  from  seigniorage,  which 
is  the  number  of  silver  dollars  that  the  bullion  will  yield 
over  and  above  the  cost  of  the  metal.  Authority  was  granted 
in  the  act  of  1900  to  use  a  part  of  this  bullion  (about 
$20,000,000)  for  subsidiary  coinage,  in  order  to  bring  the  total 
volume  of  the  latter  up  to  $100,000,000,  a  corresponding 
amount  of  Treasury  notes  to  be  canceled. 


164  GOVERNMENT    PAPER   MONEY 

The   Secretary  of  the  Treasury  was  directed  to  resume 

the  issue  of  gold  certificates,  in  denominations  not  less  than 

$20,  in  exchange  for  gold  coin  deposited  in 

Minor  Provisions    ^^    Treasury.     The  issue  of  gold  certificates 
of  the  Act  of  1890.  •'  ^ 

had  been  suspended  in  1893,  in  compliance 

with    the    law   which    said    that    it    should    be    suspended 

whenever  the  amount  of  gold  in  the  Treasury  fell  below 

$100,000,000.     It  was  also  provided  that  thereafter  silver 

certificates  should  be  issued  only  in  denominations  of  $10 

and  under,   and  that  greenbacks  should  be  issued  only  in 

denominations    of   $10    and    upward.     The    Secretary  was 

authorized,  in  his  discretion,  to    issue   a  small   amount  of 

silver  certificates  in  denominations  of  $20,  $50,  and  $100, 

not  more  than  10  per  cent  of  the  whole  amount  outstanding. 

The  object  aimed  at  in  lowering  the  denominations  of  silver 

certificates  and  raising  those  of  greenbacks  was  to  give  the 

field   of   retail   trade    as   much    as    possible   to    the    silver 

certificates. 

The  issue  of  currency  certificates  was  discontinued  by 
the  act  of  1900.  These  had  been  authorized  by  the  act  of 
June  8,  1872.  Under  it  any  national  bank  might  deposit 
United  States  notes  in  the  Treasury,  in  sums  of  not  less 
than  $10,000,  and  receive  certificates  of  deposit,  in  de- 
nominations of  not  less  than  $5000  each,  the  notes  to  be 
held  as  special  deposits  and  to  be  used  only  for  the 
:  redemption  of  the  certificates.  These  were  issued  for  the 
'  convenience  of  banks  in  settling  clearing-house  balances. 
The  reason  for  discontinuing  their  issue  was  that,  as 
there  was, now  a  plentiful  supply  of  gold  certificates  for 
clearing-house  purposes,  currency  certificates  were  no  longer 
needed. 

At  the  present  time  the  denominations  of  paper  currency, 
of  all  kinds,  authorized  to  be  issued  and  reissued  are  the 
following : 


AFTER   THE   WAR  16$ 

Greenbacks,  $io  and  upward  to  $1000;  but  some  notes 
of  the  denomination  of  $5.00,  previously  issued,  are  still 
outstanding. 

Gold  certificates,  $10  and  upward  to  $10,000. 

Silver  certificates,  $1.00  and  upward  to  $100,  but  not  more 

than  10  per  cent  of  the  total  volume  shall  be 
Denominations  of      r  u  •    u        1  •      .  •  .1         ^ 

Paper  Currency.     ^*  ^^^^^^  denominations  than  $io. 

National  bank  notes,  $5.00  and  upward  to 

$100,  but  not  more  than  one-third  of  the  total  issues  of  any 

bank  shall  be  of  the  denomination  of  $5.00.     Some  notes 

lower  than  $5.00  and  some  higher  than  $100,  issued  under 

former  laws,  are  still  outstanding. 

Treasury  notes  of  1890,  formerly  issued  in  denominations 

of  $1.00  and  upward  to  $20,  are  now  in  course  of  retirement. 

None  can  be  reissued. 


RECAPITULATION 

As  government  paper  is  a  promise  to  pay  money,  its 
value  depends  upon  the  fulfillment,  or  expected  fulfillment, 
of  the  promise,  which,  in  turn,  depends  upon  the  ability  and- 
good  faith  of  the  issuing  government. 

Several  of  the  American  states  in  the  colonial  period, 
whether  able  to  redeem  their  paper  or  not,  were  unwilling 
to  do  so.  The  government  of  the  Revolution  and  that  of 
the  Southern  Confederacy,  whether  willing  to  redeem  their 
paper  or  not,  were  unable  to  do  so.  The  government  of 
the  United  States  after  the  Civil  War,  although  able  to 
redeem  its  paper,  postponed  redemption  fourteen  years. 
During  that  interval  its  policy  in  reference  to  redemption 
underwent  frequent  changes  and  was  involved  in  doubt. 

Congress  voted  in  December,  1865,  in  favor  of  the  early 
resumption  of  specie  payments.  In  pursuance  of  this 
design,  in    April,    1866,   it  passed  a  law  for  retiring  and 


1 66  GOVERNMENT   PAPER   MONEY 

canceling  the  legal-tender  notes  at  the  rate  of  $4,000,000  per 
month.  In  February,  1868,  it  repealed  the  last-mentioned 
act,  $44,000,000  of  the  notes  having  been  retired  meanwhile. 
In  1873  the  Treasury  Department  reissued  $26,000,000  of 
the  retired  notes,  without  authority  of  law.  In  1874  Con- 
gress passed  a  bill  to  reissue  the  entire  $44,000,000,  but 
President  Grant  vetoed  it,  and  it  was  not  passed  over  the 
veto. 

In  1875  Congress  passed  an  act  to  provide  for  the 
resumption  of  specie  payments  on  the  ist  of  January,  1879. 
In  1877  the  House  passed  a  bill  to  repeal  the  specie 
resumption  act,  but  this  was  defeated  in  the  Senate  by  one 
vote.  Both  houses  passed  a  bill  providing  that  the  legal- 
tender  notes  should  not  be  retired  when  redeemed,  but 
should  be  paid  out  and  kept  in  circulation.  The  amount 
of  notes  then  outstanding  was  about  $346,000,000. 

Specie  resumption  took  place  January  i,  1879. 

In  1890  Congress  passed  a  law  for  a  new  emission  of 
legal-tender  notes  of  indefinite  amount,  to  pay  for  silver 
bullion  to  be  stored  in  the  Treasury.  The  new  issues  of 
notes  were  followed  by  the  exportation  of  gold  to  nearly 
the  same  amount  and  by  a  disastrous  financial  panic. 

This  shifting  policy  indicates  that  there  will  always  be 
uncertainty  in  respect  of  the  redemption  of  government 
paper  and  of  the  amount  issued.  Such  uncertainty  attaches 
to  the  United  States  notes  now  outstanding,  since  it  depends 
upon  the  political  majority  to  decide  what  amount  shall  be 
issued  and  whether  redemption  shall  continue  or  not.  For 
this  reason  the  notes  should  be  redeemed  with  the  surplus 
revenue  of  the  government  and  canceled  as  soon  as  possible. 


CHAPTER   VI 

SILVER  DOLLARS   AND  THE  PANIC  OF  1893 

While  Secretary  Sherman  was  selling  bonds  for  gold,  to 
prepare  for  the  resumption  of  specie  payments,  Congress 
was  passing  a  bill  for  the  remonetization  of  silver.  In 
1876  this  metal  had  declined  9  per  cent  from  our  old  ratio 
of  16  to  I.  The  currency  expansionist's,  who  had  been 
sorely  disappointed  by  President  Grant's  veto  of  the  Infla- 
tion Bill  and  by  the  loss  of  the  Ohio  elec- 
A^rtaWon^^  tion,  turned  eagerly  to  silver,  as  a  means  of 

accomplishing  the  ends  which  they  had 
failed  to  reach  with  greenbacks.  Silver,  they  said,  was  a 
product  of  labor.  Its  quantity  could  not  be  increased 
suddenly.  It  was  the  dollar  of  our  fathers.  It  was  the 
dollar  of  the  poor  man,  of  the  debtor,  of  the  common 
people.  Looking  at  the  law,  they  discovered  that  the  silver 
dollar  had  been  abolished  by  an  act  of  Congress,  passed  in 
1873,  and  that  those  of  them  who  were  members  of  Congress 
at  that  time  had  voted  for  it.  So  they  said  that  they  had 
been  tricked  and  deceived,  that  this  act  of  1873  was  a  con- 
spiracy against  the  debtor  class,  and  that  it  was  passed  in  a 
clandestine  manner.  They  declared  that  this  was  a  great 
wrong.  Many  people  who  had  no  particular  interest  to  be 
served  by  inflation  really  thought  that  a  wrong  had  been 
done.  Some  of  them  even  thought  that  the  wrong  had 
been  done  to  silver  itself,  by  depriving  it  of  the  "legal 
right  of  coinage." 

167 


l68  GOVERNMENT  PAPER  MONEY 

The  charge  that  the  act  of  1873  was  passed  secretly  was 
absurd  on  its  face,  since  there  is  no  way  under  our  sys- 
tem of  government  to  pass  a  law  secretly.  The  act  was 
called  the  "crime  of  1873  "  ;  and  the  accusation  was  reiter- 
ated frequently  and  supported  by  forged   documents   and 

false  swearing  in  the  political  campaigns  of 

The  '  *  Crime  of       .  .  •  t^  t  1  •  11 

jg     ,,  twenty  successive  years.     Due  diligence   had 

been  shown  by  the  framers  and  promoters  of 
the  law  to  publish  and  explain  its  provisions,  but  very  few 
persons,  either  in  or  out  of  Congress,  took  any  interest  in 
the  question ;  and  of  those  who  did  so  nearly  all  were  in 
favor  of  its  passage.  Nor  would  any  charge  of  fraud  and 
secrecy  have  been  brought  against  the  supporters  of  the 
measure,  if  silver  had  not  subsequently  fallen  in  value.  The 
bill  was  introduced  in  both  houses  in  1870,  at  which  time 
16  ounces  of  silver  were  worth  40  cents  more  than  i  ounce 
of  gold.  Nor  was  there  any  time  during  the  three  years 
while  the  measure  was  pending  in  Congress  when  silver  was 
worth  less  than  gold  according  to  the  legal  ratio.  Hence 
there  was  no  motive  for  deception.  The  persistence  of  the 
charge  of  fraud  during  so  long  a  period  of  time,  in  the  face 
of  so  many  opposing  facts,  is  one  of  the  most  singular 
episodes  in  our  political  annals. 

The  movement  for  the  remonetization  of  silver  acquired 
considerable  strength  in  1876.  The  opponents  of  the  Infla- 
tion Bill  were  taken  by  surprise  when  the 
ReroneTizSion.  controversy  assumed  this  new  form.  More- 
over, the  question  of  bimetallism  was  something 
new  and  strange.  Many  persons  who  had  considered  green- 
back inflation  ruinous  were  glad  to  have  escaped  the  evil  of 
unlimited  paper  but  could  see  no  harm  in  silver  dollars. 

The  opponents  of  silver  were  of  three  classes  :  (i)  those 
who  were  opposed  to  it  in  any  form  except  as  subsidiary 
coin  ;   (2)  those  who  were  opposed  to  free  coinage  except 


SILVER   DOLLARS   AND   THE    PANIC    OF    1893     1 69 

by  international  agreement ;  (3)  those  who  did  not  believe 
that  an  international  agreement  was  practicable  but  who 

wanted  to  gain  time,  hoping  that  the  excite- 
f/JartiS"''''*     ment  would  pass   away.      The   advocates  of 

silver  were  likewise  of  different  types  :  (i)  The 

silver   miners,   who   wanted  to    sustain  the  price   of   their 

product;    (2)    the    currency   inflationists,    who    had    been 

defeated  and  were  glad  to  find  a  new  weapon  to  their  hand 

in  place  of  the  greenback^;   (3)  a  multitude  of  misinformed 

persons,  who  thought  that  an  injustice,  if  not  a  fraud,  had 

been  committed  in  the  demonetization  act  of  1873. 

On  July  26, 1876,  just  before  the  adjournment  of  Congress, 

Mr.  Kelley  of    Pennsylvania   introduced    a    bill    to   restore 

the    coinao^e    of    the    silver   dollar,  as   it  had 
The  Bland  Bill.  .        ,       °  ' 

existed  prior  to  the  act  of   1873,  and  moved 

to  pass  it  under  suspension  of  the  rules,  which  required  a 

two-thirds  majority.     The  bill  failed  :  yeas  119,  nays  68.     A 

similar  bill  was  introduced  by  Mr.  Bland  of  Missouri  the 

following  year,  and  was  passed  by  the  House  November  5, 

1877,  by  164  to  34. 

In  order  to  defeat  free  coinage  and  gain  time,  some  of  its 

opponents  in  the  Senate  said  that  it  would  not  be  right  to 

1  An  inflationist  is  one  who  desires  that  the  government  shall  do 
something  to  make  money  more  plentiful  and  prices  higher,  and  whose 
political  action  is  directed  to  that  end.  Professor  Charles  J.  Bullock,  in 
his  Essays  on  the  Monetary  History  of  the  United  States,  shows  by  statis- 
tics that  the  support  of  the  silver  movement  in  the  several  states  was 
generally  in  inverse  proportion  to  the  density  of  population  and  the  abun- 
dance of  capital.  Thus  eleven  states  whose  density  was  above  60  per 
square  mile  supported  the  gold  standard  in  the  election  of  1896.  Of 
eighteen  states  whose  density  was  between  21  and  46,  only  eight  sup- 
ported the  gold  standard.  Of  sixteen  states  whose  density  was  less 
than  18,  only  four  supported  the  gold  standard,  "It  is  evident,  there- 
fore," says  Mr.  Bullock,  "that  the  inflationist  movement  at  the  present 
day,  as  in  all  previous  times,  finds  its  strength  in  the  sparsely  settled 
regions,  where  the  scarcity  of  capital  is  most  keenly  experienced  "  (p.  119)- 


170  GOVERNMENT    PAPER    MONEY 

give  to  those  who  happened  to  be  the  owners  of  silver  bul- 
lion, or  who  were  digging  it  out  of  the  ground,  an  advantage 
of  9  per  cent  over  everybody  else ;  that  this  profit  ought  to 
accrue  to  the  government;  that,  since  the  government  had 
no  silver  bullion,  it  ought  to  purchase  a  certain  quantity  at 
the  market  price,  coin  it,  and  sell  the  resulting  coins  to  the 
people,  or  use  them  to  pay  its  expenses  or  to  buy  more 
bullion.  This  was  a  plausible  argument  to  defeat  the  Bland 
bill  and  was  probably  the  only  one  by  which  a  free-coinage 
bill  could  have  been  prevented  from  passing  at  that  time. 

An  amendment  proposed  by  Senator  Allison 
Amendment  ~~  Providing  for  the  purchase  of  not  less  than 

$2,000,000  worth,  and  not  more  than  $4,000- 
000  worth,  of  silver  bullion  each  month,  to  be  coined  into 
dollars  of  full  legal  tender  and  to  be  paid  out  like  any  other 
money  in  the  Treasury  —  was  adopted  by  the  Senate  and 
accepted  by  the  House.     The  bill  was  vetoed  by  President 

Hayes,    on    the   ground    mainly   that    it   em- 

ve  oed  and  bodied    a  violation    of   contracts  which   had 

passed. 

been  entered  into  since  1873,  by  introducing 
a  less  valuable  payment  than  was  contemplated  by  the 
parties.  The  bill  was,  however,  passed  over  the  veto  and 
became  a  law  February  28,  1878.  The  votes  taken  in  the 
House  fairly  represented  the  state  of  public  opinion  at 
the  time.  There  were  73  votes  to  sustain  the  President's 
veto  —  i.e,^  against  silver  in  any  form^ — and  196  in  favor  of 
the  limited  coinage  of  the  Allison  amendment.  As  between 
the  latter  and  the  original  Bland  bill  the  vote  was  203  to  72. 
The  party  of  moderation  and  compromise  exceeded  the 
extremists  oh  both  sides.  One  section  of  the  Allison  amend- 
ment, which  authorized  the  President  to  invite  an  inter- 
national monetary  conference,  led  to  the  Paris  conference 
of  1878.  Another  section  authorized  any  holder  of  silver 
dollars  to  receive  certificates  of  deposit  from  the  Treasury 


SILVER   DOLLARS    AND   THE    PANIC    OF  1893      171 

in  exchange  for  them,  in  denominations  not  less  than  $10, 
such  certificates  to  be  receivable  for  all  government  dues. 

On  November  12,  1878,  the  New  York  clearing  house, 
after  a  personal  conference  with  Secretary  Sherman  and  in 
anticipation  of  the  resumption  of  specie  payments,  voted  to 
admit  the  sub-treasury  to  the  clearing  house,  for  the  purpose 
of  settling  balances  between  the  government  and  the  banks  ; 
to  receive  and  pay  balances  in  gold  or  in  legal-tender  notes ; 
to  prohibit  payment  of  balances  in  silver  dollars  or  silver 
certificates,  except  in  sums  under  $10;  and  to  receive  silver 
dollars  from  customers  as  deposits  only  under  special  con- 
tract to  withdraw  the  same  in  kind. 

In  1882  Congress  passed  an  act  amendatory  of  the 
national  banking  law.  In  it  was  inserted  a  provision  that 
"  no  national  banking  association  shall  be  a  member  of  any 
clearing  house  in  which  such  [silver]  certificates  shall  not 
be  receivable  for  clearing-house  balances."  The  New  York 
clearing  house  thereupon  rescinded  its  rule  discriminating 
against  silver  certificates  but  did  not  discontinue  the  practice. 
The  members  voluntarily  declined  to  pay  them  to  each  other. 

The  Bland- Allison  Act  did  not  make  money  more  plentiful 

than  it  would  otherwise  have  been,  but  merely  substituted 

silver  in  place  of  gold.     Two  operations  were  going  on,  side 

by  side.     The  mint,  regarded  as  a  manufactory,  was  paying 

out  gold  already  in  its  possession,  in  order  to  purchase  silver 

bullion,   and  was  selling  the   coins  so  produced,  crediting 

itself  with  the  seigniorage,  i.e.^  the  difference  between  the 

raw  material  and  the  finished  product.     On  the  other  hand, 

the   people   needed    a   certain    number   of   instruments   of 

exchange,  called  dollars,  for  the  transaction  of  their  daily 

business.     These   instruments  they  paid  for 
Modus  operandi.         .,,.,,  ,     ,     .  , 

With  their  labor  and  their  property,  at  the  rate 

of  100  cents  gold  per  dollar.     Obviously  they  could  have 

whichever  metal  they  preferred,  since  gold  value  will  always 


172  GOVERNMENT    PAPER   MONEY 

bring  gold.  Thus  the  bill  did  not  make  money  more  plenti- 
ful, although  it  seemed  to  do  so,  but  merely  substituted  one 
kind  of  money  for  another. 

The  mode  of  operation  was  as  follows :  The  government 
bought  (say)  $2,500,000  worth  of  silver  bullion,  paying  gold 
for  it.  When  the  silver  dollars  were  produced,  it  might  pay 
them  out  like  any  other  money  or  it  might  make  its  next 
purchase  of  silver  bullion  with  the  dollars,  or  the  certificates, 
resulting  from  the  last  purchase.  If  there  was  a  public 
demand  for  this  kind  of  money,  the  dollars  would  stay  out. 
If  not,  they  would  come  back  to  the  Treasury  through  the 
custom  house  and  the  tax  office,  taking  the  place  of  gold  in 
the  payment  of  government  dues. 

The  officers  of  the  Treasury  were  slow  in  learning  how  to 
ward  off  the  evils  of  this  queer  kind  of  currency,  of  which 
they  had  had  no  previous  experience.  Each  secretary 
restricted  the  coinage  of  silver  dollars  to  the  lowest  amount 
permitted  by  the  law,  viz.^  $2,500,000  per  month,  or  $30,- 
000,000  per  year.  As  the  coins  were  bulky  and  inconven- 
ient, the  people  refused  to  take  any  large  quantity.  At  the 
end  of  June,  1879,  only  $8,000,000  had  gone 

Slow  Circulation  i^to  circulation,  out  of  $^6,000,000  coined, 
of  the  New  _,  .     ,  .       ,      _,  ,          . 

Dollars.  The  remainder  were  in  the  Treasury,^  an  inert 

mass.     Inasmuch   as  the  government  had  a 

surplus  of  revenue  more  than  sufficient  to  pay  for  the  monthly 

purchase  of  silver  bullion,  no  present  harm  resulted. 

The  prosperity  resulting  from  the  crop  conditions  of  1879 

and  1880  called  for  an  increase  of  the  circulating  medium 

and  not  merely  led  to  the  large  importations  of  gold  referred 

to  in  the  preceding  chapter,  but  drew  out  of  the  Treasury 

nearly  all  of  the  accumulated  silver.     This  was  taken  in  the 

form  of  certificates,  in  exchange  for  gold.     The  movement 

1  See  Taussig's  Silver  Situation  in  the  United  States  (second  edition), 
which  may  be  studied  with  profit  for  all  periods  down  to  the  end  of  1896. 


SILVER   DOLLARS   AND   THE    PANIC    OF  1893     1/3 

was  accelerated  by  an  offer,  on  the  part  of  the  Treasury,  to 

pay  silver  certificates  in  the  West  and  South,  in  exchange  for 

gold  deposited  in  the    sub-treasury  at    New 

Rapid  Movement    york.     Whenever  the  rate  of  exchange  was 

in  1879  and  1880.  => 

in  favor  of  the  West  and  South,  the  person 
desiring  to  make  remittances  could  save  express  charges 
by  accepting  the  government's  offer.  In  this  way  the  sur- 
plus silver  in  the  Treasury  was  worked  off  for  the  time 
being.  "For  the  three  years  1881,  1882,  and  1883,  the 
silver  currency  was  absorbed  by  the  public  as  fast  as  the 
dollars  were  coined  at  the  mint."  ^ 

A  trade  reaction  began  in  1884.     The  silver  already  in 
circulation  remained  there,   but   the   annual  addition   con- 
tinued.    As  fast  as  it  was  paid  out  by  the 
Crisis  in  1884.  ^  .  ,  •       ,  .         ^ 

Treasury,  it  returned  m  the  receipts  for  taxes. 

Simultaneously  the  public  revenue  began  to  decline,  and  the 
gold  reserve  showed  a  shrinkage  of  $34,000,000  in  1884-85. 
Gold  receipts  for  customs  duties  fell  from  75  per  cent  of  the 
whole  to  36  per  cent,  and  silver  receipts  rose  from  17  per 
cent  to  36  per  cent,  the  other  receipts  being  greenbacks. 
In  Boston,  where  the  banks  made  no  discrimination  against 
silver,  the  certificates  constituted  so  large  a  part  of  the  cir- 
culation that,  when  it  became  necessary  to  send  money  by 
express  to  New  York,  a  sufficiency  of  gold  or  greenbacks 
could  not  be  obtained,  and  a  premium  of  one-half  of  i  per 
cent  on  funds  bankable  in  New  York  prevailed  in  Boston  for 
a  short  time.  The  New  York  banks  even  turned  in  $6,000,000 
of  their  gold  to  the  Treasury,  in  exchange  for  fractional 
currency,  in  order  to  avert  the  use  of  silver  certificates  by 
the  Treasury  in  the  settlement  of  clearing-house  balances 
there. 

In    1885   th^   Secretary  of   the  Treasury,  Mr.  Manning, 
perceived    that    the    true    method    of    utilizing    the    silver 

^  Taussig,  24. 


174  GOVERNMENT    PAPER   MONEY 

currency  was  to  force  it  into  retail  trade.     To  make  room 

for  it,  he  gave  orders  to  stop  the  issue  of  greenbacks  of 

less  denomination  than   $5.00  and  to  retain  all  such  that 

came  into  the  Treasury   in  the   way   of    col- 

Smaii  Silver         lections,   in  order  to   create   a  necessity  for 
Certificates  r     ^^  ^        r,r,^  i  /r 

introduced.  the  use  01  Silver.     In  1886  he  procured  from 

Congress  authority  to  issue  silver  certifi- 
cates of  the  denominations  of  $1.00,  ;^2.oo,  and  $5.00. 
As  national  bank  notes  smaller  than  $5.00  had  been  for- 
bidden some  years  earlier,  the  field  of  small  paper  circula- 
tion was  thus  secured  for  silver  certificates.  Thereupon  the 
demand  for  them  became  very  large,  rising  in  1890  to 
$175,000,000  in  denominations  of  $5.00  and  under,  and  to 
$293,000,000  in  all.  The  number  of  coined  dollars  in 
circulation  at  that  time  was  $56,000,000  in  addition. 

The  introduction  of  small  silver  certificates  happened  to 
coincide  with  a  shrinkage  of  the  volume  of  national  bank 
notes  due  to  the  redemption  of  the  3  per  cent  bonds  and 
to  a  rapid  advance  in  the  price  of  other  bonds,  which  made 
it  profitable  for  the  banks  to  retire  their  circulation,  sell 
their  bonds,  and  realize  the  premium.^  One  hundred  and 
sixty-eight  million  dollars  of  the  bank  notes  were  retired 
between  November,  1882,  and  February,  1890,  —  that  is,  in 
seven  years  and  three  months.  The  output  of  silver  dollars 
during  the  same  period  was  only  $50,000,000  in  excess  of  the 
bank  notes  retired. 

i"In  1883  upwards  of  ^353,000,000  government  bonds  were  on 
deposit  as  a  basis  of  bank-note  circulation.  Out  of  this  total  more 
than  ;^20o,ooo,ooo  were  in  the  3  per  cents,  and  it  was  naturally  these 
very  3  per  cents  which  the  Treasury  selected  in  its  public  debt 
redemption  [because  they  were  subject  to  call  at  par].  Whenever  such 
bonds  were  called  for  redemption,  the  bank  possessing  them  was  com- 
pelled either  to  replace  them  with  other  government  issues  bought  in 
the  open  market,  or  else  to  retire  its  circulating  notes."  —  Noyes'  Thirty 
Years  of  Anterican  Finance,  p.  108. 


SILVER   DOLLARS   AND   THE   PANIC    OF   1893      1 75 

When  the  silver  coinage  act  was  passed  in  1878,  its  oppo- 
nents predicted  that  sooner  or  later  it  would  cause  a  finan- 
cial panic.     They  said  that,  since  the  metallic  value  of  the 

silver  dollars  was  not  equal  to  the  face  value, 
Panic  predicted.  .  .  •     1      r  ^   . 

they  were  simply  a  new  kmd  of  fiat  money, 

and  that,  whenever  they  should  become  redundant,  they 
would  act  like  any  other  fiat  monef,  —  like  the  greenbacks 
at  the  beginning  of  the  war,  for  example.  There  would 
then  be  a  change  in  the  standard  of  value,  if  the  coinage 
were  continued.  This  was  a  true  prophecy,  but  the  fulfill- 
ment was  delayed  by  the  shrinkage  in  the  national  bank 
circulation  and  by  the  retirement  of  small  greenbacks,  which 
created  a  vacuum  for  the  new  silver  to  fill.  But  this  was  a 
silent  operation.  The  public  could  not  understand  it,  and 
so,  as  the  years  rolled  on  and  no  harm  came  from  the 
coining  of  silver  dollars,  the  predictions  of  panic  fell  under 
popular  ridicule. 

The  passage  of  the  Sherman  Act  of  1890  and  the  reasons 
for   it    have    been   considered   in   the   preceding   chapter.^ 

There  were  now  three  kinds  of  fiat  money 
The  Act  of  1890.        ,  .   ,       ,  ,.  .         , 

which  the  government,  according  to  its  de- 
clared policy,  must  keep  at  par  with  gold,  namely,  green- 
backs. Treasury  notes,  and  silver  dollars.  All  three  rested, 
and  still  rest,  upon  the  gold  resources  of  the  Treasury. 
Those  resources  consist  of  its  accumulated  reserve  and  of 
its  daily  receipts.  It  is  immaterial,  as  regards  the  govern- 
ment's gold  balance,  whether  redemption  is  made  at  the 
place  where  the  reserve  is  paid  out  (the  sub-treasury)  or 
where  the  receipts  come  in  (the  custom  house).  The 
effect  upon  the  balance  is  identically  the  same  in  the  two 
cases. 

Nearly  $50,000,000   of   new  fiat   money  came  into   the 
channels  of  business  the  first  year  after  the  passage  of  the 
1  Page  159. 


1/6  GOVERNMENT    PAPER   MONEY 

Sherman  Act ;  and,  as  it  happened,  an  equal  amount  of  the 
surplus  in  the  Treasury  was  paid  out  by  enlarged  appro- 
priation bills  passed  by  Congress.  These 
S'l^sgf  aldTgl!  additions  to  the  circulating  medium  presaged 
renewed  exports  of  gold,  which  took  place  in 
the  first  half  of  1891  to  the  amount  of  $74,000,000,  —  a  sum 
hitherto  unexampled  for  a  single  period  of  six  months. 

The  harvests  of  1891,  however,  happened  to  give  tempo- 
rary relief  from  the  consequences  of  bad  financiering. 
"The  United  States  produced  in  that  year  the  largest 
grain  crop  in  its  history  before  or  since.  While  Europe's 
total  wheat  yield  decreased  156,000,000  bushels  from  that 
of  1889,  our  own  crops  increased  255,000,000  bushels,  the 
largest  American  crop  on  record."  ^  The  foreign  exchanges 
turned  in  our  favor,  and  we  imported  $50,000,000  gold  in 
the  six  months  succeeding  the  harvest.  This  was  merely  a 
streak  of  luck.  As  soon  as  the  foreign  demand  for  our 
grain  was  satisfied,  the  new  fiat  money  began  once  more  to 
produce  its  usual  effects.  Gold  exports  were  resumed  in 
1892.  In  November  of  that  year  the  gold  in  the  Treasury 
had  fallen  from  $185,000,000  (in  August,  1890)  to  $124,000,- 
000  and  was  still  declining.  Secretary  Foster 
farJ°Foste?"^'  "^^^  much  depressed.  When  he  came  to  New 
York  to  speak  at  a  dinner  of  the  Chamber  of 
Commerce,  he  said,  among  other  things,  that  the  govern- 
ment intended  to  maintain  gold  payments,  even  if  it  became 
necessary  to  sell  government  bonds  for  the  purpose.  This 
was  an  admission  on  his  part  that  gold  payments  could  not 
be  continued  without  resorting  to  extraordinary  means. 
Probably  Mr.  Foster  made  this  speech  in  order  to  test  public 
sentiment  and  to  find  out  whether  he  would  be  sustained 
in  issuing  government  bonds  in  time  of  peace.  There  had 
been  no  increase  of  the  bonded  debt  since  the  close  of  the 

1  Noyes,  164. 


SILVER   DOLLARS   AND   THE    PANIC    OF    1893     1 77 

Civil  War,  and  some  persons  in  high  place  denied  that  there 
was  any  legal  authority  to  issue  new  bonds.  Apparently 
Mr.  Foster  was  satisfied  by  the  applause  with  which  his 
announced  purpose  was  received  by  his  hearers  and  by  the 
press,  for  shortly  afterward  he  issued  an  order  to  the  Bureau 
of  Engraving  and  Printing  to  prepare  new  bonds.  This 
order  was  dated  February  20,  1893,  and  Mr.  Foster  was  to 
go  out  of  .office  on  the  4th  of  March.  Naturally,  he  pre- 
ferred to  put  upon  his  successor  the  onus  of  issuing  the 
bonds,  if  he  could.  So  he  came  to  New  York  and  persuaded 
the  banks  to  give  him  a  few  millions  of  gold  in  exchange 
for  legal-tender  notes,  enough  to  carry  him  along  till  the  4th 
of  March.  This  enabled  him  to  glide  out  of  office  leaving 
the  $100,000,000  redemption  fuhd  intact,  but  with  only 
$982,410  gold  in  excess  of  that  sum  and  with  the  penumbra 
of  a  deficit  in  full  view. 

The  shrinkage  of  the  government's  reserve  and  the  con- 
tinued outpour  of  fiat  money  had  shaken  the  confidence  of 
the  business  communities  on  both  sides  of  the  water.  The 
banks  no  longer  furnished  gold  to  their  customers  who 
desired  it  for  export,  but  gave  them  legal-tender  notes 
instead.  Hitherto  no  doubt  had  crossed  the  minds  of  the 
community  that  the  government  would  redeem  its  notes  on 
demand,  but  now  it  was  seriously  questioned  whether  the 
Treasury  could  maintain  gold  payments.  The  bankers  did 
not  know  whether  the  new  Secretary  of  the  Treasury, 
Mr.  Carlisle,  would  take  steps  to  replenish  his  reserve,  and 
they  could  not  know  whether  any  steps  he  might  take  would 
be  effectual.  So  they  kept  their  gold  and  paid  their  debts 
with  legal-tender  notes. 

When  Secretary  Carlisle  came  into  office,  he  saw  bank- 
ruptcy approaching.  The  gold  receipts  of  the  Treasury 
were  now  less  than  9  per  cent  of  the  total  receipts.  He 
first  followed  his  predecessor's  example  by  soliciting  gold 


178  GOVERNMENT    PAPER   MONEY 

from  the  banks  in  New  York  City.     The  banks  responded 

by  turning  $8,000,000  into  the  Treasury,  in   exchange   for 

legal  tenders.  This  was  quickly  dissipated,  * 
Panic  of  1893.  *,  .,  ,  ^  J  f  ^ 

and  on  April   15   the    Secretary  was   obliged 

to  acknowledge  that  the  $100,000,000  fund  had  been 
encroached  upon.  It  was  the  first  time  that  this  had 
happened  since  the  fund  was  created.  On  the  20th  the 
Secretary  gave  a  newspaper  interview,  which  was.  construed 
by  the  public  to  mean  that  he  had  doubts  whether  the 
$100,000,000  fund  could  be  lawfully  used  for  the  redemp- 
tion of  the  Treasury  notes  of  1890.  This  was  a  fresh  cause 
of  alarm,  which  was,  however,  soothed  by  a  later  announce- 
ment from  President  Cleveland  that  the  redemption  of 
those  notes  in  gold  would  be  continued  under  all  circum- 
stances. 

On  the  26th  of  June  the  news  came  that  the  mints  of 
India  had  been  closed  to  silver,  and  the  price  of  that  metal 
fell  in  three  days  from  82  cents  to  67  cents  per  ounce.  A 
run  on  the  banks  began  at  once.  One  hundred  and  fifty- 
eight  national  banks  and  four  hundred  and  fifteen  state  and 
private  banks  were  compelled  to  close  their  doors. 

The  question  has  been  much  discussed  whether  the  finan- 
cial disturbance  of  1893  was  a  typical  commercial  crisis  or 
a  money  panic.     A  commercial  crisis  is  a  shattering  of  the 
credit  system  due  to  speculation  and  malad- 
Cn^^'^^^^  justment  of  industry.    If  the  conditions  of  pro- 

duction and  consumption  were  at  all  times  well 
balanced,  so  that  no  more  wheat,  cloth,  iron,  houses,  fac- 
tories, ships,  railroads,  etc.,  were  produced  than  could  be 
sold  or  used  at  a  profit,  then  each  producer  would  be  able 
to  pay  his  debts  promptly  and  there  could  be  no  commercial 
crisis.  But  in  the  complex  conditions  of  modern  society 
no  such  equable  distribution  of  capital  and  labor  is  pos- 
sible.   There  is  no  omniscient  eye  to  tell  us  when  we  are 


SILVER  DOLLARS  AND  THE   PANIC   OF  1893      I /Q 

producing  too  much  of  one  thing  or  putting  too  much  capital 
and  labor  into  certain  lines  of  business.  The  commercial 
world  is,  accordingly,  subject  to  periodical  crazes,  in  which 
there  is  a  general  rush  to  buy  things  and  invest  money  in 
ways  which  promise  unusual  gains.  Prices  are  inflated  and 
particular  branches  of  trade  are  overloaded  and  cease  to  be 
remunerative.  Then  the  adventurers  cannot  meet  their  obli- 
gations, and  their  creditors  are  crippled  or  made  bankrupt. 
Lenders  of  money  become  alarmed  and  the  credit  system 
breaks  down.  The  genesis  of  every  true  commercial  crisis 
can  be  traced  to  such  a  disproportionate  investment  of  capi- 
tal in  some  particular  branch  or  branches  of  trade  and  in 
speculation. 

A  money  panic,  on  the  other  hand,  may  come  at  a  time 
when  trade  is  in  a  normal  and  sound  condition.  Anything 
which  threatens  to  impair  the  quality  of  the  money  in  cir- 
culation may  dry  up  the  springs  of  credit,  cause  extensive 
failures,  and  produce  some  of  the  phenomena  of  a  com- 
mercial crisis.  Such  conditions  existed  in  i860  and  186 1, 
when  a  large  part  of  the  circulating  medium  of  the  country 
was  based  on  bonds  of  the  Southern  States,  which  were 
taking  steps  to  secede  from  the  Union.  It  cannot  be 
denied  that  there  was  some  unsound  trade  in  1893,  but  the 
one-sided  development  of  industry  and  the  top-heavy  stage 
of  speculation  which  mark  the  real  commercial  crisis  were 
not  general.  On  the  other  hand,  the  perils  which  menaced 
the  standard  of  value  were  sufficient  to  account  for  the 
alarm  and  for  most  of  the  consequences  that  ensued.^ 

1  "It  is  true  that  the  years  immediately  preceding  1893,  while  they 
had  been  years  of  activity,  had  not  shown  the  feverish  speculation 
which  commonly  precedes  the  storm.  Yet  in  some  parts  of  the  West, 
notably  in  Colorado,  there  had  been  wild  gambling  in  land;  and,  what 
was  probably  more  important,  there  had  been  in  preceding  years,  from 
1886  to  1890,  a  great  deal  of  reckless  investment  in  railways  and  in 
iron-making  industries.     Certainly  some  great  railway  corporations  had 


l8o  GOVERNMENT   PAPER   MONEY 

Two  powerful  causes  contributed  to  the  panic  of  1893: 
(i)  a  deficiency  of  revenue,  pointing  to  the  necessity  of 
using  the  gold  reserve  to  meet  the  current  expenses  of  the 

government;  (2)  a  fear  in  the  public  mind 
Panic.  °  ^^^^   there  be  a   change  in   the  standard  of 

value.  Yet,  when  the  panic  came,  there  was 
no  observable  tendency  on  the  part  of  bank  depositors  to 
draw  gold.  What  the  frightened  people  wanted  was  the 
means  of  payment  and  especially  the  payment  of  wages. 
Government  notes,  bank  notes,  silver  certificates,  silver 
dollars,  and  subsidiary  coins  would  meet  this  want  as  well 
as  gold,  and  even  better  in  some  respects,  because  obtain- 
able in  the  smallest  denominations.  All  these  things  com- 
manded the  same  premium  as  gold  over  certified  bank 
checks  in  Wall  Street.  If  there  was  any  premium  on  gold 
over  other  currency,  it  was  veiled  under  the  rate  of  exchange. 
The  government  itself  replenished  its  stock  of  gold  to  some 
extent  by  offering  to  deliver  notes  in  New  York  in  exchange 
for  gold  deposited  in  other  cities,  and  vice  versa.  The  cost 
of  transferring  the  funds  was  a  premium  on  gold. 

On  June  30,  1893,  President  Cleveland  issued  a  call  for  an 
extra  session  of  Congress  expressly  to  repeal  the  Sherman 
Act.     The  time  for  meeting  was  August  7.     A  bill  to  repeal 

the  silver  purchasing  clause  was  promptly 
P^fchlsfng^'^''^'    passed  by  the  House,  by  a  vote  of  239  to  108. 

In  the  Senate  there  was  a  long  delay,  due  to 
the  lack  of  any  rule  for  terminating  debate.  It  seemed  at 
one  time  as  though  the  country  was  on  the  eve  of  some 
great  change,  in  consequence  of  the  revolutionary  conduct 
of  certain  senators  in  refusing  to  allow  a  vote  to  be  taken. 

been  living  from  hand  to  mouth  for  several  years  before  1893,  borrowing 
heavily  on  short  time,  hoping  for  a  turn  in  their  favor,  helped  for  a 
while  by  the  favorable  conditions  of  1891  and  1892,  and  finally  brought 
to  bankruptcy  by  the  panic."  —  Taussig,  pp.  138,  139. 


SILVER   DOLLARS    AND   THE    PANIC   OF   1893     l8l 

But  filibustering  came  to  an  end  at  last,  and  the  repealing 
bill  passed  the  Senate  October  30,  by  43  to  32. 

The  consequences  of  the  panic  did  not  come  to  an  end, 
however.  The  Treasury  deficit  was  not  checked  by  the 
repeal  of  the  Sherman  Act.  The  gold  reserve  had  declined 
from  $99,000,000  in  July,  1893,  to  $65,000,000  in  January, 
1894.  This  was  due,  not  to  the  presentation  of  notes  for 
redemption,  but  to  an  excess  of  ordinary  disbursements 
over  ordinary  receipts.  The  deficit  was  now  running  at 
the  rate  of  $5,000,000  per  month.  The  cash  balance  in 
the  Treasury  other  than  gold  was  only  $12,000,000.  The 
situation  was  alarming. 

At  this  juncture  some  of  President  Cleveland's  political 

friends,  who   had    joined    in    repealing  the    Sherman   Act, 

asked  him  to  agree  to  a  measure  for  coining,  in  advance, 

the  seigniorage  of  the  bullion  purchased  under 

SeS^orage!"-  ^^^^  ^^^'  ^^^  ^^°^^  amount  of  bullion  pur- 
chased for  $156,000,000  would  produce  218,- 
000,000  silver  dollars.  The  difference  between  these  two 
sums  ($62,000,000)  would  be  seigniorage  whenever  the 
coinage  should  take  place,  but  the  Sherman  Act  had  not 
contemplated  the  coinage  of  the  bullion  at  any  definite 
time.  If  the  seigniorage  were  coined  in  advance,  the  new 
silver  dollars  would  be  in  the  Treasury,  and  if  paid  out 
would  aggravate  the  existing  evil,  like  a  new  issue  of  green- 
backs or  of  any  other  fiat  money.  If  not  paid  out,  people 
would  naturally  ask  why  they  had  been  coined.  Moreover, 
coining  the  seigniorage  would  have  been  interpreted  as  a 
sign  of  vacillation  and  weakness  on  the  part  of  the  Execu- 
tive and  would  have  added  to  the  prevailing  panic.  For 
these  reasons  Mr.  Cleveland  properly  refused  to  give  his 
assent  to  the  proposed  measure. 

When  Congress  met  in  regular  session  in  December, 
1893,  Secretary  Carlisle  laid  before  it  the  exact  condition 


1 82  GOVERNMENT    PAPER    MONEY 

of  the  Treasury,  and  recommended  that  his  borrowing 
powers  be  enlarged  and  modernized  by  giving  him  authority 
to  issue  government  obligations  bearing  3  per  cent  interest 
and  redeemable  in  one  year.  Such  obligations  would  be 
akin  to  the  Exchequer  bills  issued  in  emergencies  by  the 

British  government.  But  Congress  was  in  a 
cTonrres?''^  °*       sullen  mood.     The  Democrats  were  angry  with 

President  Cleveland  for  compelling  them  to 
repeal  the  Sherman  Act.  The  Republicans  could  see  no 
objection  to  a  family  quarrel  among  their  opponents  or  to 
the  pecuniary  embarrassment  of  the  Administration.  If 
the  Secretary  could  extricate  himself  by  means  of  existing 
laws,  well  and  good ;  otherwise  the  government  might  go 
to  protest.  Neither  branch  of  Congress  would  lift  a  finger 
to  prevent  it. 

It  was  now  necessary  to  do  something  decisive.  Under 
the  Resumption  Act  of  1875  the  Secretary  had  power  to 
sell  any  one  of  three  classes  of  bonds  for  the  purpose  of 
beginning  and  continuing  the  redemption  of  United  States 
notes.  Another  law,  not  noticed  at  the  time,  gave  him 
power  to  buy  coin  at  his  discretion  and  to  pay  for  it  with  any 
bonds  authorized  by  law.     In  January,  1894,  the  Secretary 

advertised,  under  the  act  of  1875,  the  sale  of 
^d Sales m        ^50,000,000  of  5  per  cent  bonds,  to  run  ten 

years  and  to  be  sold  at  the  rate  of  $117,223 
gold  for  each  $100,  thus  making  the  rate  of  interest  equal 
to  3  per  cent.  These  were  taken  mostly  by  the  New  York 
City  banks.  In  this  sale  the  element  of  coercion  was  not 
wholly  wanting.  The  banks  were  not  free  to  take  the  bonds 
or  not,  according  to  the  attractiveness  of  the  investment,  but 
were  obliged  to  consider  what  would  happen  to  themselves, 
in  common  with  the  commercial  world,  if  the  loan  should 
fail.  When  they  looked  at  that  side  of  the  shield,  they  saw 
sufficient  reasons  for  lending  their  money  to  the  government 


SILVER   DOLLARS    AND   THE    PANIC    OF   1893     1 83 

at  3  per  cent.  The  sale  brought  in  $58,660,917,  and  the 
Treasury  gold  reserve  was  carried  up  to  $107,446,802  in 
March,  but  it  did  not  remain  there  long.  Gold  exports 
began  again  in  April  and  continued  heavy  till  September; 
The  withdrawals  reduced  the  Treasury  reserve  to  $52,189,500 
in  August.  The  Secretary  was  compelled  to  advertise  a  new 
sale  of  $50,000,000  of  bonds.  This  was  effected  in  Novem- 
ber, 1894,  at  117.077,  realizing  $58,538,500,  and  bringing 
the  Treasury  reserve  up  to  $105,424,569. 

The  second  loan  did  not  have  a  soothing  effect.  On  the 
contrary,  it  convinced  the  public  on  both  sides  of  the  water 
that  the  United  States  was  nearing  bankruptcy.  In  the 
midst  of  the  trouble,  a  rumor  gained  acceptance  in  Wall 
Street  that  the  Treasury  officials  were  keeping  a  list  of  the 
persons  who  drew  gold,  intending  to  visit  displeasure  on 
them  later.  This  was  naturally  interpreted  as  a  sign  of 
panic  inside  the  Treasury.  It  augmented  the  panic  outside 
and  led  to  larger  withdrawals  of  gold  than  would  otherwise 
have  taken  place.  In  the  ten  weeks  following  the  second 
loan,  $80,000,000  gold  was  drawn  from  the  Treasury.  Of 
this  sum  $36,852,000  was  exported,  and  the  remainder, 
$43,148,000,  was  presumably  hoarded.  This  was  a  run  on 
the  Treasury,  the  like  of  which  had  not  been  known  before. 

The  danger  had  come  so  rapidly  that  steps  for  a  new 
loan  had  not  been  taken  in  time  to  ward  off  the  crisis. 
There  was  a  gloomy  conference  at  Washington  between 
the  President,  the  Secretary  and  two  or  three  bankers 
from  New  York.  The  President  was  told  that  another 
sale  of  bonds  by  advertisement  would  require  at  least  two 
weeks'  public  notice  and  that,  meantime,  the  Treasury 
would  have  suspended  payments.  The  assistant  treasurer 
in  New  York  had,  in  fact,  notified  the  Secretary  that  he 
could  not  hold  out  more  than  two  days  longer,  as  things 
were  then  going.     President  Cleveland  did  not  believe  that 


1 84  GOVERNMENT    PAPER   MONEY 

he  had  legal-  authority  to  sell  bonds  in  any  other  way  than 
in  pursuance  of  public  advertisement  and  competing  bids, 
but  at  this  juncture,  Mr.  W.  E.  Curtis,  assistant  secretary  of 
the  Treasury,  drew  attention  to  the  following  clause  of  the 
Revised  Statutes: 

Sec.  3700.  The  Secretary  of  the  Treasury  may  purchase 
coin  with  any  bonds  or  notes  of  the  United  States  authorized  by 
law,  at  such  rates  and  upon  such  terms  as  he  may  deem  most 
advantageous  to  the  public  interest. 

A  sudden  change  came  over  Wall  Street.  Gold  with- 
drawals from  the  Treasury,  which  in  January  had  ranged 
from  $1,000,000  to  $7,000,000  per  week,  fell  on  the  2d  of 
February  to  $67,000.     News  came  from  Washington  that  the 

President  had  made  an  arrangement  with  a 
ff°^8  ^^°^^*^^*^     syndicate  of  American  and  foreign  bankers, 

under  the  statute  above  cited,  to  provide 
the  Treasury  with  3,500,000  ounces  of  gold  coin,  equal  tp 
$65,117,500;  that  at  least  one-half  of  this  gold  should  be 
brought  from  Europe,  at  the  rate  of  300,000  ounces  per 
month,  and  that  the  syndicate  should  "  exert  all  financial 
influence  and  make  all  legitimate  efforts  to  protect  the 
Treasury  of  the  United  States  against  the  withdrawals  of 
gold  pending  the  complete  performance  of  this  contract." 
The  bond  deliveries  were  to  be  made  concurrently  with  the 
payments,  and  the  terms  of  the  contract  allowed  six  months 
for  its  entire  fulfillment.  This  signified  that,  besides  replen- 
ishing the  Treasury,  the  syndicate  had  undertaken  to  stop 
the  export  of  gold  for  six  months,  or  at  least  to  use  all  their 
financial  powers  to  that  end.  This  coin  was  to  be  pur- 
chased with  4  per  cent  thirty-year  bonds  at  104.49,  ^^  which 
rate  the  interest  would  be  equal  to  3I  per  cent.  The  syn- 
dicate, however,  agreed  to  accept  3  per  cent  interest  instead 
of  3|  per  cent,  if  Congress  would  make  the  bonds  specifically 


SILVER   DOLLARS  AND   THE    PANIC    OF   1893      1 85 

payable  in  gold.  President  Cleveland  sent  the  contract  to 
the  House,  with  a  recommendation  that  this  change  be  made, 
saying  that  it  would  save  the  government  $16,174,770  in 
interest  payments  during  the  time  the  bonds  would  run ; 
but  the  House  rejected  the  proposition,  by  120  to  167. 

By  this  transaction  the  Treasury's  gold  reserve  was 
brought  up  to  $107,000,000,  and  the  syndicate  did  actually 
prevent  withdrawals  from  the  Treasury  for  remittance  abroad 
for  four  or  five  months,  although  the  rate  of  exchange  would 
have  warranted  gold  shipments.  This  they  accomplished 
by  using  their  own  credit  in  London  and  selling  sterling 
exchange  at  the  current  rate.  But  their  ability  to  continue 
this  operation  depended  upon  the  state  of  international  trade 
in  merchandise  and  securities,  and  eventually  the  demand 
for  remittances  on  trade  account  became  so  heavy  that  they 
could  not  supply  it  by  their  own  credit  merely.  The  with- 
drawals for  export  began  again  on  a  large  scale  in  August, 
and  the  reserve  was  down  to  $79,000,000  at  the  beginning 
of  December. 

The  syndicate  operation  of  1895  was  assailed  with  vehe- 
mence in  Congress,  on  the  ground  that  the  terms  were  too 
onerous  to  the  government.  This  objection  was  urged  for 
the  most  part  by  men  who,  by  refusing  to  make  the  bonds 
payable  in  gold,  had  themselves  added  $16,000,000  to  the 
public  burdens.  It  is  true  that  the  syndicate  loan  wa? 
onerous,  as  compared  with  those  immediately  preceding, 
but  the  reason  was  that  it  came  at  a  time  when  the  public 
credit  was  at  a  low  ebb.^ 

1  In  a  monograph  entitled  "  Appreciation  and  Interest  "  {Publica- 
tions of  the  American  Economic  Associatiott,  August,  1896),  Professor 
Irving  Fisher  presents  a  table  showing  the  rates  of  interest  realized  on 
silver  bonds  (rupee  paper)  and  on  gold  bonds  of  the  Indian  government 
in  the  London  market  from  1865  to  1895.  Until  1875  ^^^  difference 
was  slight,  not  greater  perhaps  than  might  be  accounted  for  by  the 


1 86  GOVERNMENT   PAPER   MONEY 

While  the  financial  world  was  in  the  sensitive  and  strained 
condition  indicated  above,  President  Cleveland  (December  17, 
1895)  sent  a  message  to  Congress  on  the  subject  of  the 
boundary  line  between  Venezuela  and  British  Guiana.  The 
message  was  construed   as  a  threat  of  war  against  Great 

Britain  in  certain  contingencies.  There  was 
Panic  of  1895.  .  ,.  •      .     xtT  ,i    r, 

an  immediate  panic  in  Wall  Street,  accompa- 
nied by  renewed  exports  of  gold.  The  President  again 
appealed  to  Congress  (December  20)  not  to  adjourn  for  the 
holidays  without  having  "  done  something "  to  quiet  the 
apprehensions  of  the  public  at  home  and  abroad  as  to  our 
financial  soundness  and  honesty.  Congress  was  willing  to 
pay  the  expenses  of  a  commission  to  determine  the  boun- 
dary of  British  Guiana,  but  would  do  nothing  to  ward  off 
national  bankruptcy.  The  holiday  recess  took  place  as 
usual.  Meanwhile  the  withdrawals  of  gold  from  the  Treas- 
ury were  increasing,  $20,000,000  being  taken  in  December, 
of  which  $15,000,000  was  exported.  In  January  the  reserve 
had  fallen  to  $49,800,000. 

On  January  6,  1896,  the  Secretary  of  the  Treasury  adver- 
tised the  sale  of  $100,000,000  of  4  per  cent 
Bond^ie°°  30-year  bonds.     The  loan  was  largely  over- 

subscribed and  was  taken  at  the  average  price 
of  1 1 1. 166,  at  which  rate  the  interest  was  equal  to  3.39  per 
cent.  After  the  payments  had  been  made,  the  Treasury 
reserve  stood  at  $128,000,000.  Exports  of  gold  continued 
till  August,  when  the  reserve  fell  to  $100,957,561.    This  was 

preference  of  investors  for  payment  in  London  instead  of  Calcutta.  In 
1876  the  decline  of  silver  had  become  disturbing.  Silver  bonds  sold 
at  a  rate  which  realized  4.1  per  cent  to  the  investor  and  gold  bonds 
3.7  per  cent  ;  in  1890  silver  4  per  cent,  gold  3  per  cent;  in  1895,  silver 
3.4  per  cent,  gold  2.8  per  cent.  The  difference  in  the  last-named  year 
was  0.6  per  cent,  which  was  approximately  the  difference  that  the  bond 
syndicate  of  1895  offered  to  make  between  a  gold  bond  and  a  "coin" 
bond  of  the  United  States. 


SILVER   DOLLARS   AND    THE    PANIC    OF   1893      1 8/ 

within  a  small  fraction  of  the  sum  turned  over  to  Secretary 
Carlisle  by  his  predecessor,  Mr.  Foster.  Meanwhile  the 
sum  of  $293,481,894  had  been  borrowed.  The  deficiency 
of  revenue  in  the  fiscal  years  1894,  1895  and  1896  was 
$137,811,730,  and  the  whole  amount  of  money  spent  for 
silver  bullion  under  the  Sherman  Act  was  $155,981,002.  It 
is  noteworthy  that  these  two  sums  together  equal  the  gov- 
ernment's borrowings,  within  a  small  fraction.  If  the  diffi- 
culties of  1893-96  had  been  merely  those  of  a  deficiency  of 
revenue,  probably  all  parties  would  have  cooperated  to  bring 
them  to  an  end  by  means  of  increased  taxes  and  a  temporary 
loan.  But  since  the  standard  of  value,  the  principal  political 
issue  of  the  day,  was  involved  in  the  solution  of  the  fiscal 
problem,  no  such  cooperation  was  possible. 

The  Sherman  Act  provided  that  two  million  ounces  of 
the  bullion  purchased  should  be  coined  into  silver  dollars 
each  month  until  July  i,  1891,  and  that  thereafter  only  so 
much  should  be  coined  as  might  be  necessary  to  provide 
for  the  redemption  of  the  Treasury  notes  issued  to  buy 
the  bullion.     It  provided  also  that  the  amount  of  Treasury 

notes  outstanding  should  be  neither  greater 
Coinage  of  the  ^or  less  than  the  cost  of  the  silver  bullion 
the  Treasury.        ^"^  the  silver  dollars  coined  therefrom  then 

held  in  the  Treasury.  Accordingly,  when  any 
Treasury  notes  were  redeemed  with  silver  dollars,  it  would 
be  necessary  to  cancel  them,  in  order  to  make  the  notes 
still  outstanding  equal  to  the  silver  still  in  the  Treasury.  If 
redeemed  with  gold,  the  notes  would  be  reissued.  As  there 
is  no  provision  for  restoring  canceled  notes,  it  follows  that 
the  total  amount  of  them  in  existence  must  be  diminish- 
ing in  exactly  the  ratio  that  redemption  of  them  with  silver 
takes  place.  This  process,  as  explained  in  the  preced- 
ing chapter,  has  been  accelerated  by  the  acts  of 
and  1900. 


1 88  GOVERNMENT    PAPER   MONEY 

Under  the  acts  of  1878  and  1890  the  purchases  of  silver 
were  as  follows : 

Silver  bullion  purchased  under  the  act  of  February  28, 

1878,  fine  ounces 291,272,018 

Total  coinage  of  silver  dollars  under  said  act      ....     ^378,166,793 

Total  cost  of  silver  bullion  used  in  such  coinage     .     .     .     ^308,279,261 

Silver  bullion  purchased  under  the  act  of  July  14,  1890, 

fine  ounces       168,674,682 

Cost  of  same ^155,981,002 

Silver  dollars  coined  and  to  be  coined  there- 
from     ^218,000,000 

Less  subsidiary  coinage 20,000,000 

^198,000,000 

Total  coinage  of  silver  dollars  under  both  acts  ....     |^ 57 6, 166,793 

The  first  section  of  the  act  of  March  14,  1900,  says  that 
all  forms  of  money  issued  or  coined  by  the  United  States 
shall  be  maintained  at  a  parity  of  value  with  the  gold  stand- 
ard, and  that  "  it  shall  be  the  duty  of  the  Secretary  of  the 
Treasury  to  maintain  such  parity."     It  does 

Act  of  1900.  "'_  ,  t  t  •    , 

not  provide  any  means,  however,  by  which  to 
maintain  parity.  This  omission  is  the  more  remarkable  since 
the  bill  as  originally  reported  and  passed  by  the  House 
contained  a  clause  expressly  for  that  purpose. 

The  silver  dollar  is  a  larger  kind  of  subsidiary  coin,  and 
should  be  treated  by  the  government  exactly  as  the  smaller 
ones  are  treated.     The  government  has  received  the  value 
of  a  gold  dollar  for  every  silver  one  emitted,  and  is  there- 
fore bound  in  equity  to  redeem  the  dollars  as 

Direct  Redemp-     it  redeems  the  halves,  quarters,    and  dimes, 
tion  of  the  Silver    ^      .  .     ,  ^  ^^  n 

Dollar  Desirable.  It    IS  not   strictly   necessary   that   the   small 

change  should  be  redeemed,  but  it  is  a  great 
public  convenience,  as  is  shown  by  the  fact  that  the  redemp- 
tions amount  to  upwards  of  $32,000^000  per  year.^     The 

1  See  Treasurer's  report  for  1900,  p.  32. 


SILVER  DOLLARS    AND   THE   PANIC    OF   1893     1 89 

government  exists  for  the  benefit  of  the  people,  and  the  cost 
of  making  the  redemptions  has  been  paid  in  advance  by  the 
seigniorage  on  the  coins. 

There  are  additional  reasons,  however,  for  direct  redemp- 
tion of  the  silver  dollars.  One  is  that  such  coins  are  un- 
limited legal  tender  between  individuals.  Another  is  that 
there  is  a  certain  amount  of  public  apprehension  and  lack 
of  confidence  touching  any  coin  which  passes  for  more  than 
its  metallic  value.  This  fear  would  be  removed. by  direct 
redemption  of  the  silver  dollar.  If  such  redemption  were 
provided  for  by  law,  it  would  never  be  availed  of  except  in 
cases  of  necessity.  In  such  cases  it  would  be  universally 
desired. 

The  silver  dollar  has  so  far  ceased  to  be  a  political  issue 
that  the  future  disposition  of  it  may  soon  be  decided  on 
economic  grounds  alone.  In  1904  a  bill  was  introduced  in 
Congress,  with  the  approval  of  the  Secretary  of  the  Treasury, 
to  convert  silver  dollars  into  subsidiary  coins  as  fast  as  the 
latter  are  needed.  The  annual  increment  of  subsidiary 
silver  due  to  the  growth  of  population  and  retail  trade  is 
about  $5,000,000.  If  the  policy  were  adopted  of  recoining 
the  dollars  into  smaller  pieces  instead  of  buying  new  bullion 
therefor,  the  government  would  eventually  recover  the  money 
that  was  expended  under  the  Bland  and  Sherman  acts,  and 
the  silver  dollar  would  cease  to  be  an  object  of  suspicion  and 
alarm  in  financial  circles.  The  silver  thaler  pieces  of  Ger- 
many are  in  this  way  rapidly  disappearing  under  the  Treasury 
order  of  the  year  1900,  mentioned  on  page  66  ante. 

RECAPITULATION 

In  1873,  by  an  act  of  Congress  revising  the  coinage  laws, 
the  silver  dollar  was  omitted  from  the  list  of  coins  authorized 
to  be  struck  at  the  mint  of  the  United  States.     At  that 


190  GOVERNMENT    PAPER   MONEY 

time  the  metal  in  a  silver  dollar  was  worth  more  than  100 
cents  gold.  Any  silver  dollars  previously  coined  remained 
full  legal  tender,  but  the  metal  silver  was  demonetized  by 
that  act. 

There  was  a  gradual  decline  in  the  value  of  silver  after 
1873.  In  1876  the  price  had  fallen  so  that  the  metal  in  a 
dollar  was  worth  only  89  cents.  There  was  a  movement  in 
Congress  and  a  popular  agitation  to  remonetize  silver.  A 
bill  for  this  purpose  was  passed  by  the  House  in  1877,  and 
was  amended  by  the  Senate  so  as  to  provide  for  a  limited 
coinage  of  silver  dollars  from  bullion  purchased  by  the  gov- 
ernment. In  this  form  it  became  a  law  February  12,  1878. 
It  did  not  remonetize  silver,  since  it  did  not  authorize  the 
coinage  of  that  metal  in  unlimited  quantities  for  private 
persons.  It  was  entitled  "an  act  to  authorize  the  coinage 
of  the  standard  silver  dollar  and  to  restore  its  legal-tender 
character,"  but  the  phrase  "  standard  silver  dollar  "  was  mis- 
leading, since  the  silver  dollar  had  ceased  to  be  a  standard 
and  was  not  made  such  by  that  act.  The  act  remained  in 
force  about  thirteen  years.  Under  it  the  government  paid 
$308,000,000  for  silver  bullion,  from  which  it  coined  378,- 
000,000  silver  dollars,  which  it  paid  out  of  the  Treasury 
at  par.  The  seigniorage,  or  apparent  profit,  was  about 
$70,000,000. 

In  1890  the  act  of  1878  was  repealed  and  another  act 
was  passed,  enlarging  the  government's  purchases  of  silver 
bullion  and  providing  that  payment  be  made  with  legal- 
tender  Treasury  notes,  which  should  be  redeemable  in 
"  coin."  This  act  remained  in  force  about  three  years. 
Under  it  the  government  issued  its  legal-tender  notes  to 
the  amount  of  $156,000,000.  Simultaneously  with  this  act 
a  bill  was  passed  making  changes  in  the  tariff  by  which  the 
revenues  of  the  government  were  largely  reduced,  and  a 
deficit  became  inevitable. 


SILVER   DOLLARS    AND    THE    PANIC    OF   1893     I9I 

The  output  of  legal-tender  notes  was  accompanied  by  an 
exportation  of  gold  of  about  equal  magnitude.  The  reserve 
of  gold  in  the  Treasury  known  as  the  greenback  redemption 
fund  fell  below  the  $100,000,000  mark  in  April,  1893.  A 
financial  panic  ensued.  It  was  succeeded  by  a  severe  and 
prolonged  commercial  crisis,  during  which  it  bpcame  neces- 
sary for  the  government  to  sell  bonds  on  four  different  occa- 
sions to  replenish  its  gold  reserve.  Congress  was  called 
together  in  extraordinary  session  in  the  summer  of  1893  to 
repeal  the  silver  act,  and  it  did  so.  It  refused,  however,  to 
take  any  other  steps  to  improve  the  public  credit,  although 
repeatedly  urged  to  do  so  by  the  President  and  the  Secretary 
of  the  Treasury.  The  reason  why  it  refused  was  that  the 
standard  of  value  was  the  leading  issue  in  national  politics. 
Anything  tending  to  improve  the  public  credit  helped  the 
gold  standard,  which  the  majority  in  Congress  at  that  time 
did  not  desire. 

The  following  statistics  embrace  facts  of  importance  : 

Gold  drawn  from  the  Treasury  by  redemption  of  legal- 
tender  notes  in  14  years,  1879-92  inclusive    ....  ^43,310,887 

Gold  drawn  in  4  calendar  years,  1893-96 483,538,788 

Gold  exported  during  same  period 344,248,036 

Borrowed  by  the  government,  same  period 293,481,894 

Bonds  issued,  same  period 262,315,400 

Bonds  issued  for  gold  redemption  fund  and  interest 
thereon  : 

Principal  Interest 

^100,000,000  at  4  per  cent  for  30  years,  original  loan  (1878)  ^120,000,000 

50,000,000  at  5  per  cent  for  10  years  (1894) 25,000,000 

50,000,000  at  5  per  cent  for  9  years  (1894) 22,500,000 

62,315,400  at  4  per  cent  for  30  years  (1895) 74>778,48o 

100,000,000  at  4  per  cent  for  30  years  (1896) 120,000,000 

^{^362,315,400  ^362,278,480 


192  GOVERNMENT   PAPER  MONEY 

The  greenbacks  are  only  $346,000,000  in  amount,  yet  to 
keep  them  alive  and  to  keep  them  equal  to  gold  we  have 
issued  $362,000,000  of  bonds  and  have  obligated  ourselves 
for  $362,000,000  more  in  the  way  of  interest,  and  we  still 
owe  the  amount  of  the  greenbacks.^ 

The  silver  dollar  is  at  par  with  gold  at  the  present  time 
because  it  is  not  redundant.  Moreover,  the  government 
receives  it  as  the  equivalent  of  gold  in  payment  of  all  dues 
to  itself.  This  is  an  indirect  redemption,  yet  it  cannot  be 
depended  on  to  maintain  parity  under  all  circumstances. 
If,  by  reason  of  bad  times  and  slack  trade,  the  quantity  of 
silver  dollars  and  certificates  should  be  greater  than  the 
business  of  the  country  could  absorb  and  find  employment 
for,  they  would  accumulate  in  the  Treasury.  Eventually  the 
government's  receipts  would  be  wholly  of  silver  and  a  panic 
of  more  or  less  severity  would  be  the  probable  consequence. 

Authorities  for  Chapters  V  and  VI 

N eyes'  Thirty  Years  of  American  Finance. 

Taussig's  Silver  Situation  in  the  United  States. 

Final  Report  of  the  Monetary  Commission  of  the  Indianapolis 
Convention  (The  University  of  Chicago  Press,  1898). 

Dunbar's  article  on  «' The  Safety  of  Legal-Tender  Paper"  in 
the  Quarterly  Journal  of  Economics^  April,  1897. 

Dunbar's  Collection  of  Laws  of  the  United  States  relating  to 
Currency^  Finance^  and  Banking. 

1  An  ofiicial  estimate  by  the  chief  of  the  Loan  and  Currency 
Division  of  the  Treasury  Department,  published  in  the  Congressional 
Record  oi  April  29,  1908,  p.  5638,  shows  that  if  the  greenbacks  had 
been  funded  on  the  first  day  of  January,  1879,  into  4  per  cent  thirty- 
year  bonds  and  canceled,  the  total  cost  to  the  government  for  princi- 
pal and  interest  to  July  i,  1907,  would  have  been  $741,897,340; 
whereas  the  total  cost  and  liability  actually  incurred  on  account  of 
them  has  been  $1,081,881,562;  the  difference  in  favor  of  converting 
into  bonds  being  $339,984,222. 


BOOK   III 

BANKING 

CHAPTER   I 
FUNCTIONS  OF  A  BANK 

In  its  original  sense  the  word  "bank"  means  a  heap,  a  pile, 
an  accumulation,  as  bank  of  earth,  sand  bank,  gravel  bank. 
In  colonial  times  it  was  applied  to  any  batch 
oft?eTem^°^"^  °^  accumulation  of  paper  money.  Thus  a 
"new  Rhode  Island  bank"  meant  a  new 
emission  of  bills  of  credit  of  that  colony.  In  the  early  days 
of  the  American  republic  a  bank  was  an  association  whose 
main  business  was  the  issuing  of  notes  to  circulate  as 
money,  and  the  phrase  "  banking  privileges "  meant  the 
right  to  issue  such  notes.  Daniel  Webster  even  said  that 
the  power  to  issue  notes  to  circulate  as  money  was  the 
feature  which  distinguished  a  bank  from  every  other  insti- 
tution. At  the  present  time  the  issuing  of  notes  is  not  a 
necessary  function  of  banks,  nor  is  it,  in  our  large  cities, 
the  chief  part  of  their  business. 

A  bank  in  the  modern  sense  is  ^  mimnf^rtnyy  pf  f-y^'i^^ 
^nd  a  machine  for  facilitating  exchanges.  It  is  commonly 
said  that  banking  consists  in  receiving  money  from  depos- 
itors and  lending  it  to  borrowers.  This  is  the  proper  func- 
tion of  a  savings  bank;  but  it  is  only  a  part,  and  not  the 
largest  part,  of  the  business  of  a  commercial  bank.  The 
money  deposited  in  such  a  bank  forms  only  a  portion  of  the 
assets  which  go  to  make  up  the  bank's  credit,  which  it  issues 

193 


194  BANKING 

to  borrowers,  sometimes  in  the  form  of  circulating  notes 
payable  to  bearer,  but  oftener  in  the  form  of  book  entries 
transferable  by  means  of  checks. 

An  analysis  of  modern  banking  is  substantially  this :  A 
man  has  $10,000  of  his  own  money.  He  starts  a  bank. 
His  neighbors  deposit  $50,000  with  him.  This  money 
becomes  the  absolute  property  of  the  banker.  The  depos- 
itors have  simply  a  right  to  withdraw  an  equal  amount 
whenever  they  like,  which  right  can  be  enforced  by  law. 
The  banker  owns  the  money  and  the  depositor  has  a  claim, 
or  right  of  action,  against  him  for  an  equal  sum.  But  the 
depositors   will   not   draw   the   money   out   immediately ;    if 

they  had  intended  to  do  so,  they  would  not 
CrfdT*^'*°'^°*  have  deposited  it  at  all.     The  banker  finds 

by  experience  that  some  of  his  customers  will 
bring  in  as  much  money  as  others  draw  out,  so  that  $60,000 
is  on  hand  all  the  time.  He  infers  that  if  his  own  $10,000, 
in  connection  with  his  good  reputation,  is  considered  by  the 
public  a  guarantee  for  $50,000,  then  the  whole  $60,000  will 
serve  as  a  guarantee  for  a  much  larger  sum.  When  he 
begins,  his  balance  sheet  reads  in  this  way: 

Resources  Liabilities 

Cash     .     .     .  $60,000  Capital     .     .     .  $10,000 

Deposits  .     .     .     50,000 
$60,000  $60,000 1 

1  In  keeping  the  accounts  of  a  bank,  or  of  any  other  business,  the 
business  itself  is  considered  as  indebted  to  the  shareholders  for  the 
money  they  have  put  into  it,  and  for  all  the  profits  earned  but  not  paid 
to  them.  In  the  case  we  are  now  considering,  although  there  is  only 
one  shareholder,  the  same  rule  applies.  The  conception  of  a  bank's 
capital  as  a  liability  is  the  pons  asinorum  of  banking  science.  It  can 
be  understood  best  perhaps  by  observing  how  the  assets  of  a  failed 
bank  are  disposed  of.  The  receiver,  in  such  a  case,  represents  the  bank. 
Suppose  that  the  assets  realize  more  than  the  claims  of  all  the  creditors. 
The  excess  is  paid  to  the  shareholders  because  the  bank  oxves  them 
whatever  remains  after  other  claimants  are  paid  in  full.    In  short,  there 


FUNCTIONS    OF   A   BANK  1 95 

The  banker  now  begins  to  buy  promissory  notes,  or  bills 
of  exchange,  due  at  a  specified  time  in  the  future,  paying 
the  face  value  of  the  same,  minus  interest  at  a  certain  rate 
for  the  intervening  time.  This  is  called  discounting  com- 
mercial paper.  When  he  discounts  for  one 
mercia?Pape?°™"  ^^  ^^^  Customers  a  note  for  $1000  running 
ninety  days,  he  deducts  the  interest  (say  $15), 
entering  the  amount  under  the  head  of  profits  due  to  stock- 
holders, and  writes  the  remainder,  $985,  on  the  credit  side 
of  the  customer's  pass  book,  entering  a  corresponding  sum 
as  a  credit  to  that  person's  account  in  his  own  books.  This 
credit  is  called  a  deposit,  and  properly  so,  since  the  net 
purport  of  the  transaction  is  that  the  banker  has  bought  an 
interest-bearing  security  and  the  seller  has  deposited  the  money 
he  received  for  it  in  the  bank,  to  be  drawn  out  at  his  pleasure. 
If  the  customer  had  deposited  $1000  gold  simultaneously  with 
the  foregoing  transaction,  his  total  deposit 
l^^l^l^^^  °*  would  have  been  $1985.  Yet  there  is  a  differ- 
ence between  the  two  kinds  of  deposits,  the 
one  being  of  money  and  the  other  a  bank  credit.  In  practice, 
the  bank  credits  at  any  given  time  may  be  four  or  five  times 
as  large  as  the  amount  of  cash  in  the  bank. 

The  process  of  discounting  commercial  paper  continues 
until  the  banker  has  $200,000  of  bills  receivable  in  his  port- 
folio.    Then  his  account  stands  thus : 

Resources  Liabilities 

Cash ^60,000  Deposits   .  ^247,000 

Loans  and  discounts     200,000  Capital      .       10,000 
Profit    .     .         3,000 


$260,000  $260,000! 

are  preferred  claims  (those  of  creditors)  and  ordinary  claims  (those  of 
shareholders).  Both  are  liabilities  of  the  bank,  and  equally  valid  ones, 
in  their  proper  order. 

1  Theory  and  Practice   of  Banking,   by    Henry    Dunning    Macleod 
(fifth  edition),  I,  324. 


196  BANKING 

Thus  the  business  venture  called  a  "  bank  "  owes  to  depos- 
itors and  to  the  banker  himself  $260,000  ;  and  it  has  assets 
which  will  produce  that  amount,  but  only  $60,000  of  it  is 

cash.     It  follows  that  the  banker  has  manu- 
Credit^  °  ^^"^     f actured  something  which  serves  as  a  medium 

of  exchange  to  the  extent  of  $197,000.  This 
is  credit.  Goods  can  usually  be  bought  and  sold  with  it  as 
readily  as  with  money,  since  checks  drawn  against  deposits 
are  accepted  in  trade  by  the  whole  community.  The  whole 
$200,000  of  bills  are  not  discounted  at  one  time,  but  gradu- 
ally, so  that  some  are  always  maturing  and  bringing  in 
money  to  meet  the  banker's  liabilities. 
.  Alexander  Hamilton  saw  clearly  how  a  bank  serves  as  a 
manufactory  of  credit,  and  how  it  economizes  the  use  of  cap- 
ital. He  had  a  clear  understanding  of  the  nature  of  deposits, 
although  there  had  not  yet  been  published  any  scientific 
analysis  of  banking  operations.  In  his  report  on  the  Bank 
of  the  United  States  he  said : 

Every  loan  which  a  bank  makes  is,  in  the  first  shape,  a  credit 
given  to  the  borrower  on  its  books,  the  amount  of  which  it  stands 
ready  to  pay,  either  in  its  own  notes,  or  in  gold  or  silver,  at  his 
option.  But,  in  a  great  number  of  cases,  no  actual  payment  is 
made  in  either.  The  borrower,  frequently,  by  a  check  or  order, 
transfers  his  credit  to  some  other  person,  to  whom  he  has  a  pay- 
ment to  make ;  who,  in  his  turn,  is  as  often  content  with  a  similar 
credit,  because  he  is  satisfied  that  he  can,  whenever  he  pleases, 
either  convert  it  into  cash,  or  pass  it  to  some  other  hand,  as  an 
equivalent  for  it.  And  in  this  manner  the  credit  keeps  circulating, 
performing  in  every  stage  the  office  of  money,  till  it  is  extinguished 
by  a  discount  with  some  person  who  has  a  payment  to  make  to  the 
bank,  to  an  equal  or  greater  amount.  Thus  large  sums  are  lent 
and  paid,  frequently  through  a  variety  of  hands,  without  the 
intervention  of  a  single  piece  of  coin.^ 

1  Although  this  lucid  conception  of  the  philosophy  of  modern  banking 
was  published  in  1791,  it  was  the  task  of  Mr.  H.  D.  Macleod  (and  not 


FUNCTIONS   OF  A  BANK  IQ/ 

The  banker's  deposits  are  payable  on  demand.  In  the 
case  considered  above,  the  depositors  might  have  drawn 
their  checks  simultaneously  for  $247,000,  pay- 
CrSits°^^"^  able  to  persons  who  were  not  depositors  in 
the  same  bank,  in  which  event  they  could  not 
all  have  been  paid,  although  the  bank  would  be  eventually 
solvent.  It  would  be  able  to  pay  in  full,  but  not  until  its 
bills  receivable  should  mature.  Probably  such  a  case  as  a 
simultaneous  withdrawal  of  all  deposits  never  happened  in 
the  world,  but  it  is  quite  conceivable  that  the  depositors 
might  draw  at  once  for  more  than  $60,000,  —  that  is,  for 
more  cash  than  the  banker  has  on  hand,  in  which  case  the 
bank  would  have  to  close  its  doors. 

Thus  there  is  a  limit  to  the  banker's  power  of  discounting 

commercial  paper.     He  is  limited  by  the  probable  calls  of 

his  depositors  for"moneY  to  "he  withdrawn  frpip  ^^^  Kcanl- 

The  amount  kept  on  hand  to  meet  such  demands 
Bank  Reserves.       .  ,,     ,      ,  ,  m,  . 

is  called  the  cash  reserve.    This  reserve  is 

the  bank,  in  the  original  meaning  of  the  term, — the  heap,  or 
pile,  from  which  daily  payments  are  made  and  upon  which 
all  the  credit  operations  rest.  The  cash  reserve  may  consist 
of  any  kind  of  currency  which  is  commonly  accepted,  but 
preferably  of  legal-tender  money,  not  the  notes  of  other 
banks.  Its  amount  must  be  proportionate  to  that  of  the 
deposits.  The  right  proportion  can  be  learned  only  by 
experience  and  only  approximately.  It  varies  in  different 
countries,  and  at  different  places  in  the  same  country; 
and  the  local  banker,  as  the  person  most  thoroughly  con- 
versant with  local  conditions,  has,  as  one  of  his  most 
important  duties,  the  ascertainment  and  preservation  of 
that  reserve  which  most  nearly  meets  the  needs  of  his 
community. 

an  easy  one)  to  systematize  and  bring  it  into  general  recognition  and 
acceptance  by  economists  more  than  half  a  century  later. 


198  BANKING 

Bank  notes  are  the  banker's  promises  to  pay  money  to 
bearer  on  demand.     They  are  virtually  orders  of  the  presi- 
dent and  cashier  on  the  paying  teller.     They 
Bank  Notes.  ^  f  ^     s  y 

are  of  the  same  nature,  and  they  operate  in 

the  same  manner  as  checks  drawn  by  depositors.  Checks 
and  notes  are  equally  lawful  demands  upon  the  bank's  cash 
reserve. 

Now,  suppose  that  the  bank  above  mentioned  has  the 
right  to  issue  circulating  notes  and  that  the  customer,  whose 
paper  has  been  discounted,  desires  to  use  the  proceeds  in 

paying  the  wages  of  farm  hands,  or  factory 
Of  the  Same  .  •  •      ^        •  .  i 

Nature  as  Checks.  °P^^^t^v^S'  °^  ^"  W^^g  country  produce,  or 

in  other  ways  and  in  places  where  checks  are 
not  acceptable.  He  will  ask  for  bank  notes,  in  order  to  pay 
them  to  the  wage-earners,  farmers,  etc.  He  might  ask  for 
gold,  in  which  case  the  bank  would  be  obliged  to  give  it  to 
him,  but  the  notes  are  more  convenient  and  will  be  generally 
preferred  by  the  payees.  The  payees  may  demand  gold 
from  the  bank  for  the  notes,  if  they  choose,  but  generally 
they  will  not  do  so.  They  will  pay  them  to  storekeepers 
or  others  to  whom  they  are  indebted,  and  the  latter  will 
deposit  them  in  the  issuing  bank  to  their  own  credit,  or  in 
other  banks  which  will  send  them  to  the  issuing  bank  for 
redemption.  Eventually  they  will  be  paid  out  of  the  bank's 
cash  reserve.  They  will  be  paid  out  of  the  same  fund  from 
which  the  customer's  checks  would  have  been  paid,  if  he 
had  drawn  the  money  by  means  of  checks  payable  to  order, 
instead  of  taking  notes  payable  to  bearer. 

The  banker  cannot  decide  whether  the  credit  he  has 
extended  to  his  customer  shall  be  used  in  the  form  of  checks 
or  in  the  form  of  notes.  Nor  does  this  question  concern 
him  in  any  way,  except  that  the  notes  may  stay  out  some- 
what longer  than  the  checks.  His  liabilities  are  the  same 
in  either  case.      The  only  thing  that  need  concern  him  is 


FUNCTIONS    OF   A   BANK  199 

the  goodness  of  the  paper  which  he  bought  when  he  issued 
his  credit  to  his  customer.     The  form  of  issue,  whether  in 

checks  that  may  pass  through  one  or  two 
A^t^'aUc^^^^        hands,  or  in  circulating  notes  that  may  pass 

through  many  hands,  is  of  little  consequence ; 
and,  even  if  it  were  of  much  consequence,  it  is  beyond  his 
control.  It  is  also  beyond  the  control  of  the  depositor. 
He  will  call  for  notes  only  in  cases  where  he  cannot  use 
checks.  The  controlling  force  here  is  the  public  demand, 
to  which  both  the  banker  and  his  customers  conform.  The 
public  demand  determines  also  how  long  the  notes  shall  stay 
out  after  they  have  been  issued.  Nobody  keeps  more  notes 
on  hand  than  he  needs.  When  a  man  finds  that  he  has  a 
surplus,  he  returns  it  to  the  bank.  Thus  the  outflow  and 
inflow  of  bank  notes  is  automatic. 

While  it  is  immaterial  to  the  banker  whether  the  credit 
which  he  issues  shall  take  the  form  of  checks  or  of  notes,  it 
is  important  both  to  him  and  to  the  community  that  it  shall 
take  one  form  or  the  other,  since  the  alternative  is  the  with- 
drawal of  gold  for  purposes  of  circulation  and  the  conse- 
quent lessening  of  his  cash  reserve  ;  and,  as  we  have  seen, 

the  lessening  of  his  reserve  by  $1.00  usually 
Bank  Notes  lessens    his    ability   to    discount   commercial 

paper  by  $4.00  or  more.  If  it  is  for  the 
interest  of  the  community  that  the  system  of  bank  credits 
should  exist  at  all,  it  should  be  available  in  the  form 
of  circulating  notes,  as  well  as  of  checks  ;  for  banking 
science  consists  in  the  substitution  of  less  costly  instru- 
ments of  exchange  for  more  costly  ones,  according  to  the 
demands  of  trade.  The  bank  note,  since  it  is  one  of  the 
less  costly  ones  and  is  indispensable  in  the  modern  world, 
should  be  readily  available  as  needed.  Its  utility  is  greatest 
in  sparsely  settled  communities,  where  there  are  few  or  no 
banks. 


200  BANKING 

Bank  notes  were  first  issued  in  England  in  1670  or  there- 
abouts. They  were  instruments  of  writing  executed  by 
goldsmiths  to  people  who  had  left  money  in 
BankNote?  ^^^^^  custody.  Several  of  these  notes  were 
found  in  a  back  room  of  Child's  Bank  (the 
oldest  of  EngUsh  banking  houses)  when  it  was  removed 
from  the  vicinity  of  Temple  Bar  a  few  years  since.  The 
following  are  specimens : 

Nov.  28,  1684. 

I  promise  to  pay  unto  ye  Rt.  honble  ye  Lord  North  &  Gray, 
or  bearer  ninety  pounds  at  demand. 

For  Mr.  Francis  Child  &  myself 
J  no  Rogers. 
Picture  of      )  t.. 
Temple  Bar  [No  921.  ,      .       ^, 

''  London,  Oct.  20,  1729. 

I  promise  to  pay  to  Mr.  Richard  Bannister,  or  order,  on  demand, 

twenty  pounds. 

For  Fras.  Child,  Esq. 

Sam  Child. 
Picture  of      )  t.. 
Temple  Bar  [^^  ^792. 

^  London,  8  December  1729. 

I  promise  to  pay  to  Mr.  Chr.  Diggs,  or  bearer,  on  demand  thirty 

pounds. 

For  Fras.  Child  &  Co. 

Sam  Child.i 

Other  similar  examples  of  the  origin  and  evolution  of  the 
bank  note  might  be  cited.  The  right  to  issue  such  notes 
was  never  questioned.  They  were  simply  evidences  of  claims 
to  money  deposited  with  the  goldsmith  or  the  bank.  As  the 
business  grew,  and  the  quantities  of  notes  called  for  by 
depositors  increased,  it  became  more  convenient  to  print 
blank  forms,  to  be  filled  out  with  the  names  of  the  depositors 
and  of  the  amounts  due  them.     Still  later  notes  were  printed 

1  Macleod,  I,  283. 


FUNCTIONS    OF  A   BANK  201 

for  round  sums, —  as,  for  example,  five  or  ten  pounds, — 
which  could  be  handed  in  quantities  to  the  persons  entitled 
to  receive  them  ;  and  these  were  made  payable  to  bearer,  or 
to  order,  according  to  the  wish  of  the  depositor.  The  busi- 
ness of  discounting  commercial  paper  was  added  to  the 
goldsmith's  vocation  very  soon  after  the  practice  of  deposit- 
ing money  with  him  became  common,  and  then  the  notes 
were  issued,  if  desired,  to  the  persons  getting  the  discounts. 

Thus  the  issuing  of  such  notes  became  recognized  as  a 
right  at  common  law.  Anybody  could  issue  them  and  put 
them  in  circulation,  if  people  were  willing  to  take  them.  It 
was  found  in  course  of  time  that  the  exercise  of  this  right 
^  was  exposed  to  accident  and  liable  to  abuse, 

Righr'"'''^^'^  and  that  the  State  must  interpose  for  the  pro- 
tection of  society.  At  first  it  was  believed 
that  such  protection  could  be  secured  by  restricting  the 
issue  of  circulating  notes  to  a  select  number  of  persons  of 
well-known  character,  generally,  but  not  always,  incorporated 
as  a  bank.  Thus  certain  charters  granted  to  banks  in  this 
country  before  the  adoption  of  the  federal  constitution  (the 
Bank  of  North  America  in  Philadelphia,  the  Bank  of  Massa- 
chusetts, and  the  Bank  of  New  York,  which  still  exist) 
contain  no  mention  of  circulating  notes,  since  the  right  to 
issue  them  existed  without  legislative  authorization.  The 
Bank  of  New  York  began  business  and  issued  circulating 
notes  seven  years  before  it  received  a  charter. 

In  the  public  discussions  of  recent  years  the  question  has 
frequently  been  asked  why  the  banker  should  receive  inter- 
est on  his  outstanding  notes,  while  the  customer 

Why  Interest  is     pays  interest  on  the  note  which  he  gave  in 

paid  for  the  Use      ^   •^,  ^         ,  .,,,.,        r 

of  Bank  Notes.      exchange  for  them.     As  both  kmds  of  notes 

are  debts,  why  should  one  of  these  two 
persons  pay  interest  more  than  the  other?  There  is,  how- 
ever, a  vital  difference  between  the  two  kinds  of  notes.     The 


202  BANKING 

banker's  notes  are  payable  on  demand.  Any  person  into 
whose  hands  they  come  may  demand  gold  for  them  imme- 
diately. If  he  does  not  do  so,  it  must  be  because  he  finds 
the  notes  better  adapted  to  his  immediate  wants.  The 
customer's  note,  on  the  other  hand,  is  not  payable  till  a 
fixed  time  in  the  future.  It  is  said  in  rebuttal  that  the  right 
to  issue  notes  to  circulate  as  money  has  been  conferred 
upon  one  of  these  parties  by  statute,  and  that  he  has  thus 
been  given  an  artificial  advantage.  This  is  an  error  ;  for, 
as  we  have  seen,  the  statute,  instead  of  conferring  a  right 
on  the  banker,  has  curtailed  a  preexisting  right. 

Society  derives  an  advantage  from  the  banker's  operations 
which  it  can  well  afford  to  pay  for,  whether  the  credit  which 
he  issues  takes  the  form  of  deposits  and  checks,  or  of  cir- 
culating notes.  The  discount  of  commercial  paper  has 
been  aptly  defined  as  "the  swapping  of  well 
How  Banks  aid      known   credit   for  less  known   credit."     The 

in  the  Work  of  i  ,  •   ,  •  i  •  rr.. 

Production.  bank  first  establishes  its  own   credit.      Ihen 

it  is  the  banker's  business  to  find  out  what 
persons  in  the  community  are  worthy  of  its  credit.  .  Credit 
enables  persons  to  obtain  the  use  of  capital  which  they 
could  not  otherwise  acquire.  For  the  present  purpose 
capital  may  be  defined  as  anything  which  aids  man  to 
produce  wealth  and  is  not  gratuitously  bestowed,  such  as 
tools,  materials,  food,  etc.  The  banker,  if  he  understands 
his  trade,  enables  the  most  deserving  persons  in  the  com- 
munity to  get  capital,  —  that  is,  to  get  possession  of  the  tools 
and  materials  of  industry  without  the  use  of  money.  The 
most  deserving  persons,  in  the  commercial  sense,  are  those 
who  can  make  the  most  profitable  use  of  tools  and  materials, 
and  who  are  believed  to  be  honest.  By  swapping  its  well 
known  credit  for  their  less  known  credit  the  bank  performs 
a  service  which  they  are  willing  to  pay  for,  and  it  performs 
a   service  to  society  by  economizing  tools  and  materials. 


FUNCTIONS    OF  A    BANK  203 

Anything  which  puts  these  things  into  the  right  hands  and 
keeps  them  out  of  the  wrong  hands  is  a  gain  to  the  world. 
The  continuing  life  of  a  bank  is  presumptive  evidence  that 
it  is  doing  this  thing,  for,  if  it  were  not,  its  own  losses  and 
expenses  would  eat  it  up. 

RECAPITULATION 

A  bank  is  an  institution  where  deposits  of  money  are 
received  and  paid,  where  credit  is  manufactured  and  ex- 
tended to  borrowers,  and  where  the  exchange  of  property  is 
facilitated.  Having  first  acquired  the  confidence  of  the  com- 
munity, the  bank  extends  its  credit  by  purchasing  interest- 
bearing  securities,  mainly  business  men's  notes,  payable  at 
a  fixed  time  and  giving  the  sellers  the  right  to  draw  checks 
upon  itself  payable  at  sight.  The  amounts  thus  authorized  to 
be  drawn  are  termed  deposits,  the  bank  being  liable  for  them 
in  the  same  way  as  for  actual  money  deposited.  It  is  found 
in  practice  that  a  bank  may  safely  extend  its  credit  to  an 
amount  much  larger  than  its  cash  on  hand,  the  excess  being 
an  inexpensive  but  useful  addition  to  the  world's  instruments 
of  exchange. 

A  bank  requires  a  certain  amount  of  money  over  and 
above  its  deposits  as  a  capital,  to  secure  and  hold  the  con- 
fidence of  the  community  and  to  meet  unforeseen  emer- 
gencies in  business,  but  there  is  no  definite  proportion 
between  capital  and  deposits  established  either  in  law  or  in 
practice.  The  capital  invested  is  one  of  the  liabilities  of 
the  bank,  but  as  a  lien  on  the  assets  is  secondary  to  the 
claims  of  creditors. 

Bank  notes  are  the  bank's  promises  to  pay  money  to 
bearer  on  demand.  They  are  the  president's  checks  on  the 
bank,  and  are  payable  out  of  the  cash  reserve,  the  same  as 
checks  drawn  by  customers.     When  the  bank  extends  its 


204  BANKING 

credit  to  a  customer,  it  is  of  little  consequence  whether  the 
credit  shall  be  used  in  the  form  of  checks  or  of  notes.  The 
bank's  liability  is  the  same  in  either  case,  but  notes  usually 
remain  in  the  hands  of  the  community  somewhat  longer 
than  checks. 

Bank  notes  were  originally  instruments  of  writing,  executed 
bygoldsmiths  or  other  persons,  promising  to  return  the  specific 
sums  of  money  lodged  with  them.  The  right  to  issue  them 
was  consequent  upon  the  right  to  receive  the  money  deposited, 
and  thus  became  recognized  as  a  right  at  common  law.  In 
the  early  years  of  our  government  the  right  of  a  bank  to  exist 
carried  with  it  the  right  to  issue  circulating  notes.  At  present 
the  right  to  issue  notes  is  restricted  in  various  ways  in  all 
civilized  countries.  For  wholesale  and  for  many  kinds  of 
retail,  trade  bank  checks  are  the  most  convenient  means  of 
payment,  but  for  paying  wages  or  carrying  on  some  kinds 
of  business  notes  are  preferred.  It  is  the  public  demand, 
not  the  preference  of  either  the  banker  or  his  customer,  that 
decides  what  proportion  of  payments  shall  be  made  with 
checks  and  what  with  notes.  The  public  demand  also  deter- 
mines how  long  the  notes,  when  taken  out  of  the  bank,  shall 
remain  in  circulation.  Bank  notes  are  most  useful  in  rural 
communities  where  banks  are  few  and  population  is  sparse. 

Authorities 

Macleod's  Theory  and  Practice  of  Banking. 

Dunbar's  Chapters  i7i  the  Theory  and  History  of  Banking. 

Conant's  History  of  Modern  Banks  of  Issue. 


CHAPTER   II  '  • 

A  BANK   STATEMENT 

A  BANK  statement  is  an  accounting,  either  voluntary  or 
compulsory,  rendered  by  the  bank's  officers  to  its  share- 
holders, which  is  published  for  general  information.  The 
bank,  as  an  institution,  is  liable  for  all  balances  which  have 
accrued  against  it  in  the  course  of  business  and  is  also  liable 
to  the  shareholders  for  the  capital  and  for  all  profits,  whether 
carried  to  the  surplus  fund  or  not.  Thus  there  are  two 
kinds  of  liabilities,  though  they  are  generally  put  under  a 
single  head.  We  will,  however,  separate  them  for  the  sake 
of  clearness,  taking  for  illustration  a  statement  of  one  of  the 
national  banks  of  New  York  City  dated  September  30,  1901. 

Resources 

I.  Loans  and  discounts ^48,719,212.94 

-  2.  Overdrafts,  secured  and  unsecured 32,507.06 

3.  United  States  bonds  to  secure  circulation  ....  50,000.00 

4.  Stocks,  securities,  etc 309,720.99 

5.  Banking  house,  furniture,  and  fixtures 1,414,250.00 

6.  Other  real  estate  owned 14,667.85 

7.  Due  from  national  banks 5,904,767.29 

8.  Due  from  state  banks  and  bankers 373>7 72-55 

9.  Checks  and  other  cash  items     ........  361,627.10 

10.  Exchanges  for  clearing  house 5,011,772.87 

11.  Notes  of  other  national  banks 11,500.00 

12.  Lawful  money  reserve  in  bank,  viz. : 

Specie #11,905,413.29 

Legal-tender  notes 2,297,826.00 

■ 14,203,239.29 

13.  Redemption   fund    with   United    States   Treasurer 

(5  per  cent  of  circulation) 2,500.00 

14.  Due    from    United    States   Treasurer,    other    than 

5  per  cent  redemption  fund 16,000.00 

Total ' #76,425,537-94 

205 


206  BANKING 

Liabilities 
To  Creditors 

15.  Individual  deposits ^29,923,255.97 

16.  Due  to  other  national  banks      ........  26,368,474.36 

17.  D^e  to  state  banks  and  bankers 7,905,820.09 

18.  Due  to  trust  companies  and  savings  banks      .     .     .  4,372,752.72 

19.  Demand  certificates  of  deposit 135,205.69 

20.  Certified  checks 906,907.57 

21.  Cashier's  checks  outstanding 794,499.40 

22.  National  bank  notes  outstanding 49,500.00 

To  Shareholders 

23.  Capital  stock  paid  in 2,000,000.00 

24.  Surplus  fund 2,500,000.00 

25.  Undivided  profits,  less  expenses  and  taxes  paid  .     .  1,468,657.14 

26.  Dividends  unpaid    .     .     ■ 465.00 

Total ^76,425,537.94 

I.  Loans  and  discounts  consist  chiefly  of  promissory- 
notes,  drafts,  and  bills  of  exchange,  running  for  short 
periods  —  say,  two  to  four  months  —  executed 
Discounts  ^y  "^^^  engaged  in  active  business.     As  the 

liabiUties  of  a  commercial  bank  are  payable 
on  demand,  it  cannot  safely  make  loans  for  long  periods, 
although  it  may  renew  short  ones  from  time  to  time.  Promis- 
sory notes  may  be  executed  by  one  person,  firm,  or  corpora- 
tion and  offered  for  discount  without  other  security.  Such 
notes  are  called  single-name  paper.  A  promissory  note 
drawn  by  A  to  the  order  of  B,  indorsed  by  the  latter  and 
offered  for  discount,  is  called  double-name  paper,  since 
both  A  and  B  are  held  for  the  payment  of  it. 

Such  paper,  whether  single  or  double-name,  may  or  may 
not  have  its  origin  in  a  sale  of  goods  on  time,  for  which 
the  seller  wishes  to  obtain  the  money  at  once.  If  it  does 
not  take  its  rise  in  any  business  transaction  already  con- 
cluded, it  is  called  accommodation  paper.     Bankers  have 


A   BANK    STATEMENT  207 

no  absolutely  certain  means  of  knowing  whether  a  note 
represents    a   concluded    transaction   or    an    intended   one. 

They  are  justly  suspicious  of  accommodation 
Accommodation     p^per,  yet  the  difference  between  such  paper 

and  other  unsecured  notes  is  not  so  great  as 
it  seems.  Both  are  loans  on  personal  security,  since  in 
neither  case  has  the  banker  a  lien  on  any  particular  goods. 

The  essential  distinction  between  real  and  accommodation  bills 
is  that  one  represents  past  and  the  other  future  transactions.  In 
a  real  bill  goods  /lave  been  purchased  which  are  to  meet  the  bill ; 
in  an  accommodation  bill  goods  are  to  be  purchased  which  are  to 
^meet  the  bill.  But  this  is  no  ground  for  preference  of  one  over 
the  other.  A  transaction  which  has  been  done  may  be  just  as 
wild,  foolish,  and  absurd  as  one  that  has  to  be  done.  The  inten- 
tion of  engaging  in  any  mercantile  transaction  is  that  the  result 
should  repay  the  outlay  with  profit.  There  is  no  other  test  of  its 
propriety  but  this,  in  a  mercantile  sense.  The  true  objections  to 
accommodation  paper  are  of  a  different  nature.  As  real  bills 
arise  out  of  the  transfers  of  property,  the  number  of  them  must 
be  limited  in  the  very  nature  of  things.  However  bad  and  worth- 
less they  may  be  individually,  they  cannot  be  multiplied  beyond  a 
certain  extent.  There  is  therefore  a  limit  to  the  calamities  they 
cause.  But  accommodation  bills  are  means  devised  to  extract 
funds  from  bankers  to  speculate  with,  and  consequently  these 
speculations  may  be  continued  as  long  as  these  funds  can  be 
extracted.! 

The  Scotch  banks  have  a  system  of  "  cash  credits  "  which 
consist  largely  of  accommodation  paper.  There  are  ten 
banks  in  Scotland,  with  about  nine  hundred  branches, 
bringing  at  least  one  branch  within  reach  of  every  hamlet 
in  the  country.  The  cash  credits  are  authorizations  granted 
to  persons  to  draw  a  maximum  amount  of  money  from  the 
bank   within  a  given  time   and  returnable  within   a  given 

1  Macleod,  I,  308. 


20S  BANKING 

time,  interest  to  be  paid  only  for  the  amount  drawn  and  the 

time  it  is  kept  out.     These  are  loans  on  personal  security, 

never  less  than  two  names  being  required,  generally  three 

.or   more.      A  very   large   percentage   of    the 
*' Cash  Credits."  r     i       r^ 

cash  credits  or  the  Scotch  banks  are  made  to 

the  agricultural  classes,  but  they  are  not  made  on  mortgage 
security  and  they  are  not  allowed  to  stagnate.  The  cash 
credits  are  entered  as  deposits  on  one  side  of  the  bank's 
ledger  —  that  is,  under  the  head  of  liabilities.  On  the  other 
side  they  appear  under  the  title  "bills  discounted,  cash 
accounts  and  other  advances,"  as  resources. 

Drafts  and  bills  of  exchange  payable  at  a  future  time  and 
purchased  by  the  bank  are  included  under  the  head  of  loans 
and  discounts.  In  this  country  the  two  terms  signify  the 
same  thing,  except  that  the  word  "draft"  is 
of^Exchange^^^^  applied  to  instruments  payable  at  some  dis- 
tance from  the  drawer  but  within  the  United 
States,  and  the  term  "  bill  of  exchange  "  to  those  payable  in 
foreign  countries.  They  are  orders  in  writing,  drawn  upon 
the  custodian  of  funds  belonging  to  the  drawer  or  for  the 
payment  of  goods  sold  to  the  drawee. 

A  draft  or  bill  of  exchange  is  usually  made  payable  to  the 
order  of  a  third  person.  If  not  payable  at  sight,  it  must  be 
presented  to  the  drawee  as  soon  as  possible,  and  he  must 
write  the  word  "accepted"  on  it  and  sign  his  name  there- 
under ;  otherwise  it  must  be  at  once  protested  for  non- 
acceptance.  .  Then  two  persons  are  responsible  to  the 
holder  of  it.  If  the  holder  gets  it  discounted  at  his  bank, 
he  must  indorse  it,  and  thus  he  also  becomes  responsible 
for  it.  It  may  go  through  several  hands, 
each  holder  indorsing  it  before  he  parts  with 
it.  It  acquires  strength  with  each  transfer,  since  all  the 
persons  who  have  indorsed  it  are  successively  responsible 
for  its  payment.     These  are  the  most  important  circulating 


A   BANK    STATEMENT  20g 

instruments  of  modern  commerce,  since  nearly  all  the 
wholesale  transactions  of  the  world  are  effected  by  them, 
and  since  they  range  over  the  whole  world  and  are  not 
limited,  like  bank  notes,  to  their  parent  country.  Two  or 
more  bills  of  exchange  may  be  in  existence  at  one  time 
touching  one  lot  of  goods,  since  it  is  the  transfer  and  not 
the  creation  of  them  that  gives  rise  to  the  bills.  The  chief 
business  of  banks  is  to  discount  bills  of  exchange,  so  that 
the  maker  or  holder  may  have  the  present  value  of  them 
in  cash. 

Bills  of  exchange  are  sometimes  accompanied  by  bills  of 
lading,  warehouse  receipts,  stocks  or  bonds,  which  are  spe- 
cific titles  to  property,  the  bank  having  a  lien 
Bills  of  Lading.  ,  -i     ,      ,  .,i  •  •  i        rm 

on  the  property  until  the  bill  is  paid.      Ihese 

are  simply  a  superior  kind  of  bills.  They  command  a  lower 
rate  of  interest  because  of  theif  higher  security,  and  in  a 
stringent  money  market  they  will  command  money  when 
other  bills  are  refused.  All  other  discounted  bills  are  loans 
on  personal  security. 

Another  variety  of  bills  of  exchange  arises  from  the  use  of 
letters  of  credit.  These  are  instruments  of  writing  issued 
by  a  bank,  authorizing  the  holder  to  draw  upon  the  issuing 
bank  or  upon  some  affiliated  institution,  at  sight  or  other- 
wise, and  within  a  definite  period  of  time,  not  exceeding  in 
the  aggregate  a  certain  sum.     It  is  stipulated  in  the  body 

of    the    instrument   that   the    amount   of   all 
Letters  of  Credit.     ,      ,  ,  .,,        r  ,  •         ,  , 

drafts,  or  bills  of  exchange,  negotiated  under 

it  shall  be  indorsed  upon  it,  so  that  it  shall  always  show 
how  much  of  the  credit  remains  unexhausted.  The  names 
of  the  banks  or  persons  in  various  parts  of  the  world  (corre- 
spondents of  the  issuing  bank)  who  will  cash  or  discount 
the  drafts  so  drawn  are  printed  on  it.  A  large  part  of  the 
foreign  purchases  made  by  merchants  is  effected  through 
bills   of   exchange   drawn   under   letters   of   credit.     Such 


2  10  BANKING 

letters  are  also  much  used  by  tourists  to  pay  their  traveling 
expenses. 

2.  Overdrafts,  secured  and  unsecured,  constitute  an  item 
in  nearly  all  bank  statements.  Strictly  speaking,  they  ought 
not  to  be  there  at  all,  but  it  sometimes  happens  that  a  depos- 
itor overdraws  his  balance  by  mistake.  In  such  a  case  the 
bank's  officers  exercise  their  discretion,  based  upon  their 
knowledge  of  the  man's  character  and  resources,  in  deciding 
whether  they  will  pay  the  check  which  overdraws  the  balance 
or  not.  Until  the  overdraft  is  made  good  or  is  proved  uncol- 
lectable  it  is  properly  reckoned  as  an  unpaid  debt  among 
the  bank's  resources. 

3.  United  States  bonds  to  secure  circulation  will  be  more 

fully  considered  in  the  chapter  on  the  national 
Bonds^.^^^*^'        banking    system.       It    may   be    remarked    at 

present  that,  this  item  of  $50,000  among  the 
resources  is  offset  in  large  part  by  the  outstanding  circulating 
notes  ($44,520)  among  the  liabilities. 

4.  It  is  desirable  that  a  bank  should  have  a  portion  of 
its  interest-bearing  assets  so  invested  that  it  can  be  quickly 
turned  into  cash  to  meet  a  sudden  emergency.  This  is 
especially  needful  in  the  case  of  a  bank  which  holds  large 
sums  deposited  by  other  banks,  since  a  financial  disturbance 
occurring  in  a  distant  quarter  may  bring  sudden  demands  for 
cash  from  these  depositing  banks.  Stock  exchange  securi- 
ties are  held  by  banks,  partly  because  they 

other  Interest-      ^^n  be  sold  at  short  notice  to  meet  such  emer- 

Bearing  Securi-  .  ,     . 

ties.  gencies,  partly  because  opportunities  occur  to 

bankers  for  acquiring  them  at  low  prices,  and 

sometimes  because  they  have  been  compelled  to  take  the 

securities  for  debts,  which  would  otherwise  have  been  lost. 

5.  Banking  house,  furniture,  and  fixtures  are  proper 
resources  of  a  bank ;  for,  if  it  does  not  own  such  property, 
it  must  pay  rent  to  others  for  equivalent  accommodation. 


A   BANK    STATEMENT  211 

6.  Commercial  banks  do  not  usually  lend  money  on  the 

security  of  real  estate.  Under  our  national 
Real  Estate. 

banking  law  they  are  not  allowed  to  do  so, 

but  they  may  take  such  property  for  unpaid  loans  previously 

made  in  good  faith. 

7,  8.     There  is  always  a  current  account  between  banks 

for  collections  which  they  make  for  each 
Bankr""^^^"      other.      They  also   lend   and    borrow  among 

themselves  and  deposit  money  with  each 
other  for  the  sake  of  interest. 

9.  Checks  and  other  cash  items  include  checks  and  drafts 
on  private  banks  in  the  city  not  members  of  the  clearing 
house,  and  small  advances,  payable  on  demand,  which  do 
not  go  into  the  category  of  loans  and  discounts. 

10.  Exchanges  for  the  clearing  house  are  the  checks, 
drafts,  and  other  claims  on  other  banks,  members  of  the 
clearing  house,  which  have  not  yet  been  collected. 

11.  Notes  of  other  national  banks  are  put  in  a  place  sep- 
arate from  the  other  cash,  because  under  the  national  bank- 
ing law  they  cannot  be  counted  as  a  part  of 

Notes"^^^^^^       the  legal  reserve.     For  this  reason  the  banks 
do  not  keep  any  large  amount  of  bank  notes 
on  hand.      They  pay  them  out  on  checks,  or  send  them  to 
Washington  for  redemption  in  lawful  money. 

12.  These  items  constitute  the  bulk  of  the  bank's  cash 
reserve,  amounting  all  together  to  $14,203,239.29.  The  legal 
reserve  may  consist  of  gold,  gold  certificates,  legal-tender 
notes,  silver,  and  silver  certificates.    The  banks  keep  very  few 

silver  dollars  and  not  more  subsidiary  silver 
Reserve^  than  is  needed  for  making  change  or  meeting 

the  demands  of  customers.  The  use  of  silver 
certificates,  however,  is  increasing,  since  they  are  the  only 
paper  currency  of  denominations  less  than  $10  that  can  be 
obtained  in  large  amounts. 


212  BANKING 

13.  The  national  banking  law  requires  that  every  bank 
which  issues  circulating  notes  shall  keep  a  deposit  of  lawful 

money  in  the  Treasury  of  the  United  States 
demptfonFund.     ^^"^^  ^°  5  P^r  cent  of  the  amount  thereof  for 

the  redemption  of  the  same.  This  deposit 
may  be  counted  as  a  part  of  the  bank's  legal  reserve. 

14.  There  is  nothing  to  indicate  what  this  sum  may 
represent.  Money  is  constantly  passing  between  the  banks 
and  the  Treasury.  This  item  may  represent  subsidiary 
coins  sent  to  the  Treasury  for  redemption  but  not  yet 
redeemed,  or  it  may  be  money  sent  for  the  purchase  of 
subsidiary  coins  not  yet  received. 

15.  The  first  item  of  liabilities  is  individual  deposits, 
which  have  been  sufficiently  explained  in  the  preceding 
chapter. 

16.  17,  18.  Under  the  national  banking  law  country  banks 
are  allowed  to  keep  three-fifths  of  their  legal  reserve  in  cer- 
tain city  banks  approved  by  the  comptroller  of  the  currency. 
We  may  infer  from  the  magnitude  of  the  sum  "  due  to  other 
national  banks  "  that  this  is  one  of  the  city  banks  so  approved. 
Apart  from  this  provision  of  law  it  is  customary  for  country 

banks  to  keep  considerable  sums  on  deposit 
Deposits^^"^       in  city  banks,  for  the  convenience  of  making 

remittances  for  customers  and  also  for  the  sake 
of  the  interest  allowed  by  the  city  banks,  which  is  usually  at 
the  rate  of  2  per  cent  per  annum.  It  has  been  a  question 
much  disputed  in  this  country  whether  it  is  good  banking 
practice  to  allow  interest  on  such  deposits  payable  on 
demand.  It  has  been  argued,  in  opposition  to  it,  that  it  tends 
to  the  accumulation  in  the  city  banks  of  large  sums  which 
are  liable  to  be  called  for  suddenly  whenever  anything  unu- 
sual happens  in  financial  circles  elsewhere.  Such* deposits 
are  said  to  be  in  a  high  degree  "  explosive,"  tending  to 
cause  panics,  or  to  aggravate  them  when  they  come.     But 


A   BANK   STATEMENT  21 3 

it  is  argued,  on  the  other  hand,  that  somebody  will  always 
be  found  to  pay  interest  on  deposits.     If  the  banks  do  not, 

the  trust  companies  and  private  bankers,  who 
dTosUs^"^  keep  their  deposits  in  the  city  banks,  will  do 

so  ;  and  they  will  draw  their  own  deposits 
to  meet  the  calls  of  the  country  banks  as  suddenly  and  as 
freely  as  the  country  banks  themselves  would.  The  deposits 
will  then  be  as  "  explosive  "  in  the  one  case  as  in  the  other. 
Therefore  the  question  to  be  considered  is  whether  the  city 
banks  shall  reap  the  profits  which  arise  from  the  deposits  of 
the  country  banks  or  allow  other  parties  to  do  so.  The 
same  principles  apply  to  the  deposits  of  state  banks  and 
trust  companies,   etc. 

19.  Demand  certificates  of  deposit  are  merely  a  change 
of  form  of  ordinary  deposits  for  making  remittances,  or  for 
the  use  of  travelers  within  the  range  of  territory  where  the 
credit  of  the  issuing  bank  is  known.     John   Doe,  in  New 

York,  for  example,  wishes  to  remit  money  to 
DepoSr^''°*        Richard  Roe,   in   some  town   in  which  John 

Doe's  bank  has  no  correspondent  or  on  which 
it  does  not  draw.  He  cannot  get  a  draft  payable  in  that 
town,  but  a  bank's  certificate,  payable  to  the  order  of  Richard 
Roe,  will  answer  the  purpose  equally  well.  Accordingly, 
John  Doe  draws  a  check  against  his  own  deposit  and  asks 
the  bank  to  change  the  form  of  it  into  a  certificate. 

20.  Certified  checks  are  virtually  certificates  of  deposit  in 

another  form.     They  are  the  checks  of  depositors  on  which 

the  paving:  teller  of  the  bank  has  stamped  the 
Certified  Checks.  f  ^^       .^     ,    ,         ,  -^      ^   „ 

words  :    "  Certified  by  the   Bank      and 

placed  his  initials  or  some  device  recognizable  by  the  other 

banks.     A  check  so  certified  becomes  the  obligation  of  the 

bank  in  the  same  sense  as  a  certificate  of   deposit.     The 

amount    is    immediately   charged   against   the    account   of 

the  drawer. 


214  BANKING 

2  1.    The  cashier  of  a  bank  draws  checks  on  the  paying 

teller  for  the  purchase  of  securities  from  bill  brokers,  stock 

brokers,  and  others.     The  sellers  deposit  these 

Cashier's  Checks.     ,       ,      .       ,     .  ,        ,  ,    ,  ,     , 

checks  in  their  own  banks,  and  they  are  settled 

at  the  clearing  house  like  other  checks. 

2  2.  The  circulating  notes  of  this  bank  are  a  very  small 
part  of  its  total  liabilities.  This  subject  will  be  more  fully 
treated  in  the  chapter  on  the  national  banking  system. 

23,  24.  The  capital  of  a  bank  is  primarily  a  guarantee 
fund  contributed  by  the  shareholders  to  give  it  stability  and 
to  create  confidence  in  its  soundness.  A 
Surplus ^°^  bank  might  exist  in  fair   weather   for  some 

considerable  time  without  capital,  and  many 
attempts  have  been  made  by  speculators  to  realize  that 
ideal,  but  any  bank  so  launched  has  generally  succumbed  to 
the  first  financial  gale.  The  surplus  is  a  portion  of  the 
bank's  profits  not  divided  among  the  shareholders  but 
set  aside  as  a  permanent  addition  to  the  guarantee  fund. 
Under  the  national  banking  law  the  accumulation  of  a  sur- 
plus equal  to  20  per  cent  of  the  capital  of  each  bank  is 
made  compulsory.  Before  the  declaration  of  a  dividend 
one-tenth  of  the  net  profits  must  be  deducted  and  set  aside 
for  that  purpose  until  that  percentage  is  reached.  For  all 
banking  purposes  the  surplus  becomes  an  integral  part  of 
the  capital. 

25,  26.    A  bank  statement  must  always  show  the  amount 

of  the  accrued  profits  not  yet  divided.     Dividends  are  usually 

paid  the  same  day  that  they  are  declared,  but  it  sometimes 

hapDens  that  shares  of  stock  have  changed 
Profits.  ,        ,  ,  ,  .,,.,... 

hands  or  have  been  involved  in  litigation,  or 

that  the  owners  have  died  since  the  last  payment  was  made. 

In  such  cases  the  money  remains  in  the  bank  awaiting  the 

rightful    claimants,   and    appears   among   the    liabilities   as 

"dividends  unpaid." 


A   BANK    STATEMENT  21 5 


RECAPITULATION 

A  bank  statement  is  an  exhibit  of  the  bank's  resources 
and  liabilities  made  by  the  officers  to  the  shareholders,  to 
the  depositors,  and  to  the  public  generally.  The  resources 
and  the  liabilities  are  placed  in  separate  columns.  The 
resources  consist  of  all  the  money  in  the  bank,  all  the 
things  received  in  exchange  for  money,  and  all  the  claims 
it  holds  against  others.  The  liabilities  embrace  all  that 
it  owes  to  depositors  and  other  creditors,  all  the  capital 
contributed  by  shareholders,  and  all  earnings  undivided  or 
unpaid.  Therefore  the  amounts  of  the  two  columns  should 
be  exactly  equal.  If  the  inventory  of  the  resources  and  the 
value  placed  upon  them  by  the  officers  are  correct,  the 
statement  shows  the  exact  financial  condition  of  the  bank. 

The  national  banking  law  requires  each  bank  to  make 
at  least  five  statements  each  year  showing  its  condition 
at  dates  already  past,  which  shall  be  designated  by  the 
comptroller  *of  the  currency.  No  bank  can  know  before- 
hand what  date  will  be  chosen  by  him.  Consequently  no 
special  preparations  can  be  made.  The  statements  must  be 
written  on  blanks  furnished  by  the  comptroller,  which  go 
much  more  into  details  than  those  published  in  the  news- 
papers. The  fact  that  these  statements  must  be  made,  and 
that  they  will  be  closely  scrutinized  by  other  bankers,  as  well 
as  by  experts  in  the  comptroller's  office,  operates  as  a  spur 
and  incentive  to  correct  methods  and  honest  management 
on  the  part  of  each  individual  banker,  but  is  not  an  absolute 
guarantee  thereof. 


CHAPTER  III 

THE  CLEARING-HOUSE  SYSTEM 

The  functions  of  a  bank  as  a  machine  for  facilitating 
exchanges  are  shown   on  the  most  extensive  scale  in  the 

operations    of  the  clearing  house.      This   is 
of^ciearinr  ^"  association  of  banks  whose  primary  object 

is  to   settle  the  claims   which   the   members 

hold  against  each  other.     If  there  were  only  two  banks  in 

a  particular  place,  there  would  be  no  need  of  a  clearing 

house.     Two  clerks  would  meet  at  regular  intervals,  at  the 

banking  house  of  one  or  the  other,  and  compare  the  claims 

that  each  held  against  the  other.     If  Bank  A  held  checks, 

drafts,  etc.,  for  $10,000  drawn  on  Bank  B,  while  the  latter 

held  only  $9000  drawn  on  the  former,  Bank  B  would  pay 

$1000  to  Bank  A  and  the  checks,  drafts,  etc.,   would  be 

mutually  surrendered.      A  clearing  house  merely  enables 

any  number  of  banks  to  settle  their  balances  in  about  the 

same  time  that  two  banks  could  do  so,  the  clearing  house 

being,  for  this  purpose,  the  only  creditor  and  the  only  debtor 

of  each  bank. 

The  clearing-house  system  was  first  introduced  in  New 

York  in  1853.     Prior  to  that  time  it  had  been  customary 

for  each  bank  to  send  a  messenger  to  every 
The  Old  System.         ,         ,        ,  ,      ,  .  ,  ,       ,  , 

other  bank  each  day  with  a  pass  book  and  a 

package  of  claims.     Thus,  Bank  A  would  sort  out  all  the 

checks  and  other  claims  it  held  against  Bank  B  and,  writing 

the   amount  in    the  book  on  the   debit  side   of  the   page 

assigned  to  that  bank,  would  send  the  book  and  package 

216 


THE  CLEARING-HOUSE  SYSTEM  21/ 

to  the  latter.  Bank  B  would  acknowledge  receipt  of  the 
checks  and  write  on  the  credit  side  of  the  page  the  amount 
of  its  claims  on  Bank  A,  delivering  by  its  own  messenger 
the  corresponding  checks,  etc.,  drawn  on  Bank  A  and  hav- 
ing the  proper  acknowledgment  made  on  its  own  pass  book. 
As  there  were  thirty-eight  banks  in  New  York  at  that  time, 
there  were  seventy-six  bank  messengers  continually  travers- 
ing the  streets,  getting  in  each  other's  way  and  in  the  way 
of  the  bank's  customers,  and  liable  to  assault  or  accident. 
The  balances  were  shown  each  day  by  the  footings  of  the 
pass  books  but,  on  account  of. the  labor  of  carrying  and 
counting  gold  coin,  which  was  the  only  money  receivable 
between  banks,  the  settlements  were  made  only  once  a  week, 
and  then  by  actual  delivery  of  the  coin,  which  was  also  car- 
ried in  bags  through  the  streets. 

Now  there  are  forty-nine  members  of  the  New  York  Clear- 
ing House,  including  the  assistant  treasurer  of  the  United 

States,  the  former  number  (6i)  having  been 
QeTrSffHouse      reduced    in    recent  years    by    consolidations. 

There  are  also  seventy-nine  banks  and  trust 
companies,  not  members  of  the  clearing  house,  that  clear 
through  other  banks. ^  The  Union  Trust  Company,  for  ex- 
ample, makes  an  arrangement  with  the  Bank  of  Commerce, 
by  which  all  checks  drawn  on  the  former  may  be  presented 
at  the  clearing  house  to  the  settling  clerk  of  the  latter  and 
be  treated  by  the  latter  exactly  like  checks  drawn  on  it- 
self. In  this  case  the  Bank  of  Commerce  is  responsible  to  its 
fellow-members  of  the  clearing  house  for  checks  drawn  on 
the  Union  Trust  Company  in  the  same  way  as  for  its  own 
checks.  Accordingly,  it  may  happen  that  any  bank  may  go 
to  the  clearing  house  with  checks  and  drafts  drawn  on  one 
hundred  and  twenty-seven  different  institutions. 

1  On  May  9,  191 1,  trust  companies  were  admitted  to  the  clearing 
house  as  members. 


2l8  BANKING 

In  order  to  expedite  the  work,  it  must  separate  these 
checks  into  not  more  than  forty-nine  packages,  one  for  each 

member  of  the  clearing  house  upon  which  it 
fo?ciearing!  holds  any,  and   prepare  a  schedule  showing 

the  total  amount  of  its  claim  on  each  bank. 
It  must  also  have  a  debit  ticket  to  be  delivered  to  each  — 
showing,  for  example,  that  Bank  A  has  a  total  claim  on 
Bank  B  for  so  much  money.  It  must  also  come  to  the 
clearing  house  with  a  statement  showing  the  aggregate  of 
all  its  claims  on  all  the  banks.  This,  which  is  its  claim 
against  the  clearing  house  for  that  day,  is  handed  to  the 
manager  of  the  clearing  house  or  to  the  proof  clerk  immedi- 
ately upon  entering.  All  these  things  must  be  done  before 
the  operation  of  clearing  begins. 

Each  bank  sends  to  the  clearing  house  a  delivery  clerk 
and  a  settling  clerk.  The  settling  clerks  occupy  seats  in 
three  parallel  rows  running  lengthwise  of  the  clearing  room, 
each  one  having  a  sufficient  amount  of  desk  room  for  his 
work.  The  delivery  clerks,  with  their  packages  of  checks  in 
separate  envelopes,  stand  in  an  open  space  in  front  of  the 
settling  clerks. 

All  are  expected  to  be  in  their  places  about  ten  minutes 
before  lo  o'clock  in  the  morning.  At  two  minutes  before 
lo  the  manager  of  the  clearing  house  strikes  a  bell;  and, 
if  any  clerk  is  not  in  his  place  at  that  time,  he  is  fined  $2. 
The  next  movement  is  made  with  the  precision,  and  with 
something  of  the  appearance,  of  a  military  drill.  At  exactly 
10    o'clock   the    bell    is    sounded    a    second    time.       Each 

delivery  clerk  then  hands  to  the  settling  clerk 

in  front  of  him  the  package  of  checks,  etc., 
drawn  upon  the  latter's  bank,  and  at  the  same  time  drops 
the  debit  ticket,  which  shows  the  aggregate  amount  of  such 
claims,  into  an  aperture  in  the  settling  clerk's  desk.  The 
delivery  clerk  then  takes  one  step  forward  and  repeats  the 


THE    CLEARING-HOUSE   SYSTEM  219 

operation  with  the  next  settling  clerk,  and  so  continues  until 
he  has  handed  out  all  his  packages  and  tickets.  Usua.lly  this 
part  of  the  operation  is  completed  in  ten  minutes.  Mean- 
while the  proof  clerk,  who  occupies  a  desk  near  the  manager, 
has  entered  the  claims  of  each  bank  under  the  head  "  Banks 
Cr."  on  a  schedule  like  that  shown  on  page  220. 

Inasmuch  as  the  amount  of  each  bank's  claim  against  the 
clearing  house  (entered  under  the  head  "  Banks  Cr.")  is  the 
sum  of  all  the  tickets  which  its  delivery  clerk  has  pushed 
into  the  letter  boxes  of  the  other  banks,  it  follows  that  all 
the  tickets  of  all  the  banks  should  equal  all  the  entries  under 
that  head.  The  next  step  in  the  operation  is  for  each  set- 
tling clerk  to  arrange  the  amounts  of  all  his  debit  tickets 
in  a  column,  add  it  up,  and  send  the  amount  to  the  proof 
clerk,  who  transcribes  and  arranges  it  under  the  head 
"  Banks  Dr.,"  so  that  the  debit  of  Bank  A  shall  be  on  the 

same   line  with  its  credit.     Then  the   differ- 
The  Result.  .  ,  .,,      ,  , 

ence  between   the   two  will  show  how  much 

the  bank  owes  the  clearing  house  or  how  much  the  clearing 
house  owes  the  bank.  The  time  occupied  by  the  settling 
clerks  in  arranging  their  tickets  and  adding  up  the  columns 
is  about  half  an  hour.  As  fast  as  these  footings  are  com- 
pleted, they  are  sent  to  the  proof  clerk,  who  puts  them  in  the 
debit  column  opposite  the  credits  of  the  banks  respectively. 
When  all  are  completed,  if  no  error  has  been  made,  the 
footings  of  the  credit  and  debit  columns  must  be  exactly 
equal,  and  the  footings  of  the  columns,  which  show  the 
differences,  must  be  exactly  equal.  Then  these  differences 
are  read  off  slowly  and  distinctly  by  the  manager,  so  that 
each  settling  clerk  can  write  down  the  sum  that  his  bank 
has  to  pay  or  to  receive. 

As  time  is  money  at  the  clearing  house,  somebody  is  fined 
for  every  error,  for  every  delay  in  making  footings,  for 
disobeying  the  orders  of  the  manager  or  for  any  disorderly 


220 


BANKING 


N    N    Ti-  On 

q\oo  00  rn 
00  vd  v6  LT) 

CO  LO  o  vO 

oo"  o"  d  n" 

00  M  ooo 


rooo 

VO 

M-00    "^  c^ 
ONOO    CO  On 

VO 

M      O 

N 

rooo 

C) 

o 

00    ^ 

N 

ON  ro 

ON 

N  O    CO  "^ 

M 

.5^ 

Os  CO 

VO 

00  \0  vo    H-. 

»o 

^00 

ON 

Tl-   CO  Tl-  ON 

00 

■^  t^ 

N 

>0    0\ 

00 

w    CO  r^  Ti- 

ON 

to   M 

o 

r^ 

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Tj-    T^    TtVO 

CO 

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M    CO  M 

Tf 

l-C 

O  Onw  volom  r^ONr^iOM  toN  m  co-^-^m  t^oo  vo  w  ''^  O  On  co  tj-  onoo 
^mcic^cocowww  covq  00  -^00  -^O  r^s  CO  coaq  mno  r^c^oo  -^m  com 
ci  rj-'^r^o'ooNd  d  r^c>  covd  c3  ^vd  d  ^vd  ■^'^t-^cJ  r^-^Lot>)vo  rfod 
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THE   CLEARING-HOUSE    SYSTEM 


221 


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222  BANKING 

conduct.  Forty-five  minutes  from  lo  o'clock  are  allowed 
for  completing  the  proof.  For  all  errors  remaining  undis- 
covered at  1 1. 1 5  the  fines  are  doubled,  and  at  twelve  o'clock 
quadrupled.  The  highest  fine  for  an  error  discovered  before 
II. 15  is  $3. 

The  table  on  the  preceding  pages  is  an  exact  copy  of  a 
proof  sheet  of  the  New  York  clearing  house.  It  is  obvious 
that  it  makes  little  difference,  as  regards  the  time  and  labor 
required  to  effect  the  clearings,  whether  the  amount  cleared 
is  large  or  small.  The  clearing  house  is  thus  seen  to  be  one 
of  the  great  labor-saving  machines  of  the  modern  world. 

Payments  of  clearing-house  balances  are  made  with  gold 
coin,  gold  certificates,  or  legal-tender  notes.  Gold  certificates, 
when  not  otherwise  defined,  are  those  issued  by 
of  payifnf '"^  ^^^  United  States  Treasury ;  but  some  clear- 
ing houses  which  have  vaults  receive  gold 
deposited  by  their  own  members  and  issue  certificates  which 
are  available  in  making  payments  at  the  clearing  house  or 
•  between  members,  but  cannot  be  transferred  to  non-members. 
Four-fifths  of  the  payments  at  the  New  York  clearing  house 
are  made  with  clearing-house  gold  certificates.  The  debtor 
banks  must  pay  what  they  owe  to  the  clearing  house  before 
1.30  P.M.,  after  which  the  clearing  house  pays  the  same 
money  to  the  creditor  banks.  The  clearing  house  is  not 
responsible  for  the  goodness  of  the  checks,  drafts,  etc., 
which  pass  through  it,  but  each  bank  is  responsible  to  its 
fellow-members. 

The  clearings  of  the  New  York  clearing  house  now  average 
$254,000,000  per  day  and  the  balances,  paid  in  about  1.30  p.m., 
as  above  described,  average  $11,600,000  per 
cieSngs.'°*  day,  or  a  little  less  than  5  per  cent  of  the 
clearings.  It  follows  that  about  95  per  cent 
of  these  transactions  offset  each  other.  The  New  York 
clearings  are,  in  point  of  magnitude,  about  two-thirds  of 


THE    CLEARING-HOUSE    SYSTEM  223 

all  the  clearings  in  the  United  States,  since  New  York  is 
the  place  where  other  American  cities  most  commonly  settle 
their  balances  with  each  other. 

The  members  of  the  clearing  house  determine  what  kind 
of  claims  shall  be  admitted  to  the  clearings.  Usually  these 
are  checks,  drafts,  and  certificates  of  deposit, 
of^cieaTfiiT'^'  which  are  payable  at  sight  or  have  already 
matured.  Yet  the  practice  is  not  uniform. 
Some  clearing  houses  admit  also  the  promissory  notes  and 
acceptances  of  private  individuals  which  are  drawn  "  payable 

at  the Bank  "  and  have  matured.     Others  admit  checks 

and  drafts  drawn  on  out-of-town  banks  which  are  corre- 
spondents of  members  of  the  clearing  house.  In  some 
clearing  houses  payment  of  balances  may  be  made  by  drafts 
drawn  on  other  designated  cities,  or  partly  in  cash  and 
partly  in  such  drafts.  In  Boston  the  practice  exists  of 
borrowing  and  lending  balances  among  the  members,  on 
the  floor  of  the  clearing  house,  immediately  after  the  day's 
balances  are  ascertained,  and  60  per  cent  of  the  balances 
are  usually  disposed  of  in  this  way.  Thus,  suppose  that  a 
certain  bank  has  a  credit  balance  of  $100,000  at  the  clearing 
house  for  which  it  has  no  immediate  use.  In  order  to  save 
interest  on  this  sum  even  for  a  single  day,  it  lends  its 
balance  to  a  debtor  bank  "on  call" — that  is,  repayable  at 
demand.  The  creditor  bank,  in  that  case,  gives  an  order 
in  writing  to  the  manager  of  the  clearing  house  to  transfer 
so  much  of  its  balance  to  the  borrowing  bank.  This  practice 
is  so  common  in  Boston  that  the  clearing-house  rate  of  inter- 
est is  quoted  regularly  in  the  newspapers. 

The  clearing-house  association  is  well  fitted  for  the  per- 
formance of  other  duties  than  those  of  ascertaining  and 
settling  balances  among  the  members.  It  is  especially 
qualified  for  the  task  of  checking  financial  panics.  It 
sometimes  happens   that   the   demands    of   depositors   for 


224  BANKING 

currency  are  so  great  that  the  cash  reserves  of  the  weaker 
banks  are  at  the  point  of  exhaustion,  rendering  them  liable 
to  suspend  payments.    As  the  suspension  of  one  bank  at 

such  a  time  may  lead  to  excessive  demands 
LorncTtSes.  upon  other  banks,  causing  them  to  suspend 

also,  it  is  necessary  to  grapple  with  the  crisis 
before  it  becomes  unmanageable.  The  banks  therefore 
unite,  through  the  clearing  house,  in  the  issue  of  "  clearings 
house  loan  certificates,"  in  order  to  avert  general  disaster. 
There  have  been  six  crises  in  which  the  New  York  banks 
have  adopted  this  method — and  in  the  later  cases  with  very 
complete  success.  The  last  one  was  in  1907,  and  a  descrip- 
tion of  the  process  in  this  case  will  make  clear  the  principles 
involved. 

The  panic  began  with  the  suspension  of  the  Knicker- 
bocker Trust  Company,  October  22.  The  immediate  con- 
sequence was  the  rapid  withdrawal  of  deposits  from  the 
banks.  Obviously,  if  all  the  deposits  of  a  bank  are  de- 
manded in  this  form  at  once,  they  cannot  be  paid  out  of  a 

reserve  which  is  usually  only  one-fourth  of  that 
Reserves^"     ^     ^^"^'     ^^^  some  banks  have  larger  reserves 

than  others.  Some  are  habitually  more  cau- 
tious than  others.  Some  have  larger  capital  and  surplus,  in 
proportion  to  their  liabilities.  Some  have  a  more  steady- 
going  class  of  depositors,  less  likely  to  be  affected  by  panic, 
than  others.  Such  banks  are  able  to  help  their  weaker 
neighbors.  By  combining  or  "  pooling  "  the  reserves  of  all 
the  banks,  the  weaker  ones,  or  those  most  exposed  to  danger, 
may  be  saved,  and  thus  the  panic  may  be  restrained  or 
wholly  averted.  It  is  necessary,  however,  that  the  str-onger 
banks  be  secured  for  the  advances  which  they  make,  and 
the  method  successfully  adopted  in  1907  for  aiding  the 
weaker  banks,  without  injuring  the  stronger  ones,  was  the 
issue  of  clearing-house  certificates. 


THE  CLEARING-HOUSE   SYSTEM  225 

On  the  26th  of  October,  1907,  the  Clearing-House  Associa- 
tion resolved  that  any  member  might  present  to  the  loan 

committee  its  bills  receivable  or  other  seciiri- 
cer^ficates  ^^^^'  together  with   its   own   obligation,  and 

receive,  in  exchange  for  such  securities  as  were 
approved  by  the  committee,  "certificates  "  for  75  per  cent 
of  the  par  value  of  the  same  —  these  certificates  to  be 
accepted  in  lieu  of  cash  in  the  payment  of  balances  at  the 
clearing  house.  The  certificates  drew  interest  at  6  per  cent, 
payable  to  the  holder,  and  were  in  the  following  form : 

No.  — . 

Loan  Committee  of  the  New  York  Clearing-House 
Association. 

This  certifies  that  the  [name  of  bank]  has  deposited  with 
this  committee  securities  in  accordance  with  the  proceed- 
ings of  a  meeting  of  the  Association  held 
DoiL^s^^"^^^*  October  26,  1907,  upon  which  this  certificate  is 
issued.  This  certificate  will  be  received  in 
payment  of  balances  for  the  sum  of  Five  Thousand  Dollars 
from  any  member  of  the  Clearing-House  Association. 

On  the  surrender  of  this  certificate  by  the  

depositing  bank  above  named  the  committee  

will  endorse  the  amount  as  a  payment  on  the  

obligations  of  said  bank  held  by  them  and 

surrender  a  proportionate  share  of  the  collat-  

eral  securities  held  thereunder.  

$S^OOO  Committee. 

The  certificates  could  not  be  used  for  any  other  purpose ; 
and,  as  they  drew  the  highest  legal  rate  of  interest  from  the 
time  they  were  used,  there  was  a  pressure  upon  the  banks 
not  to  take  out  more  than  they  really  needed.  On  the 
proof  sheet  shown  above,  the  creditor  banks  were  entitled 
to  receive  $13,073,026.50,  which  might  be  paid  to  them 


226  BANKING 

(except  fractional  sums)  in  the  obligations  of  the  debtor 
banks,  secured  by  these  loan  certificates.  Thus  the  reserves 
of  all  the  banks  were  made   a   common  fund.     The  total 

reserve  was  not  made  any  larger  by  this  means, 
Public  Mind.         ^^^  ^^^  ^^^  reserves  of  all  the  banks  were  made 

available  for  those  banks  which  were  in  tem- 
porary straits  ;  and  the  aggregate  demand  for  currency  was 
lessened,  because  the  union  of  the  banks  had  a  powerful 
influence  on  the  public  imagination.  It  did  not  lessen  any 
real  want  of  currency,  but  it  quieted  people's  fears  and 
checked  their  imaginary  wants. 

Suppose  that  a  "  run  on  the  banks  "  takes  place  in  a 
town  which  has  only  two  such  institutions  —  Bank  A  with 

a  large  cash  reserve,  and  Bank  B  with  a 
smau^Town^        small   one.     Bank   A,  instead  of  demanding 

payment  of  the  checks  on  Bank  B,  which  it 
receives  in  the  course  of  business,  may  accept  the  obliga- 
tions of  the  latter,  secured  by  its  assets,  and  leave  it  free  to 
use  all  its  cash  in  meeting  demands  made  directly  upon  it. 
By  this  arrangement  Bank  A  practically  lends  Bank  B  cash 
for  paying  depositors  as  long  as  the  reserves  of  the  two  hold 
out.  If  the  run  should  continue,  however,  both  banks, 
although  essentially  sound,  would  be  forced  into  liquida- 
tion, unless  their  creditors  should  be  willing  to  accept 
certified  checks  which  could  not  be  immediately  paid. 
Any  creditor  whose  demand  was  not  paid  could  force  a 
liquidation.^ 

This  represents  on  a  narrow  scale  what  takes  place  on  a 
wide  scale  in  a  city  with  a  large  clearing-house  association 

1  In  the  panic  of  1893  there  were  three  banks  in  the  town  of 
Albany,  Ga.,  which  weathered  the  storm  by  means  of  clearing-house 
loan  certificates.  In  Vicksburg,  Miss.,  five  banks  joined  together  in  an 
agreement  that  they  would  not  pay  more  than  ^50  per  day  in  cash  to 
any  one  depositor,  and  did  so  with  impunity. 


THE   CLEARING-HOUSE   SYSTEM  227 

issuing  loan  certificates  in  a  panic.     The  combined  reserves 
of  sixty-two  banks  are  exhaustible  in  the  same  way  as  those 

of  two  banks  or  of  one  bank,  but  a  large 
That  of  a  Large     group    of    banks    united    together    inspires 

confidence.  People  believe  that  it  cannot 
fail,  and  because  they  so  believe,  it  does  not  fail.  When 
the  combined  reserves  have  been  lowered  to  the  danger 
point,  the  banks,  instead  of  paying  cash  on  checks  presented 
to  them,  may  stamp  them  "  good  through  the  clearing  house  " ; 
and  in  nine  cases  out  of  ten  the  holders  of  the  checks  will 
accept  them  in  this  form  and  pay  them  to  their  creditors, 
who  will  deposit  them  in  their  own  banks.  The  checks 
thus  certified  pass  through  the  clearing  house,  where, 
as  we  have  seen,  95  per  cent  of  them  offset  each  other. 
Every  bank  is  required  by  law  to  pay  every  check,  on 
demand  in  legal-tender  money.  Yet,  if  the  holder  of  the 
check  accepts  the  stamp,  ''good  through  the  clearinghouse," 
in  lieu  of  cash,  the  law  is  satisfied.  If  he  insists  upon  pay- 
ment at  all  hazards,  the  bank  must  pay  or  close  its  doors,  and 
in  every  such  case  it  will  try  to  pay.  It  keeps  back  some 
of  its  cash  for  such  emergencies  and  to  meet  the  needs  of 
manufacturers  for  the  payment  of  wages,  or  to  answer 
demands  where  special  hardship  would  arise  from  the  want 
of  currency.  At  such  times  the  influence  of  public  opinion 
is  all-powerful  and  does  not  allow  men  to  exercise  their  full 
rights.  The  fact  is  recognized  that  the  banks  cannot  pay 
all  their  deposits  at  once  and  that,  when  a  crisis  comes, 
the  banks  can  best  judge  what  discrimination  should  be 
made. 

The  whole  amount  of  loan  certificates  issued  by  the  New 
York  Clearing  House  in  1907  was  $101,060,000,  of  which 
$88,420,000  were  outstanding  at  one  time.  This  did  not 
prevent  the  partial  suspension  of  cash  payments.  There 
came  a  time  when  most  of  the  banks  made  some  difficulty 


228  BANKING 

about  the  payment  of  checks  over  the  counter,  although 
the  clearing-house  operations  continued  without  interrup- 
tion. Then  the  phenomenon  of  a  "  premium 
fiTaysTrevented.  °^  Currency "  was  witnessed  in  Wall  Street. 
Certain  persons  who  had  currency  in  their 
possession  were  glad  to  sell  it  at  a  profit,  while  others  who 
needed  it,  but  who  preferred  not  to  add  to  the  troubles  of 
the  banks  by  demanding  it  from  them,  were  willing  to  give 
more  than  equal  amounts  in  the  form  of  certified  checks 
for  it.  In  this  way  a  brisk  business  sprang  up  and  the  pre- 
mium of  currency  over  certified  bank  checks  rose  as  high  as 
4  per  cent. 

There  are  other  features  of  the   panic,  however,  which 
should  not  be  overlooked. 

In  order  to  prevent  people  from  drawing  their  own  money 
out  of  banks,  and  at  the  same  time  to  prevent  the  banks 
from  incurring  any  penalties  for  refusing  pay- 
Legal  Holidays      "^^"t,  the  Governor  of  Oregon,  in  the  autumn 
of  1907,  declared  legal  holidays  continuously 
from  October  28  to  December  14,  seven  weeks;  that  is,  he 
legalized  bank  suspension  for  that  period.    The  Governor 
of  California  declared  such  holidays   from  October  31   to 
December  21,  eight  weeks,  suspending  the  whole  judicial 
system  of  the  state,  both  civil  and  criminal.     In   Indiana 
the  Attorney-General  declared  that  no  state  law  was  violated 
by  banks  or  trust  companies  in  limiting  payments  on  depos- 
its, if  part  payment  was  offered  in  each  case.     The  Auditor 
of  the  same  state  assured  all  the  banks  and 

other  Plans  trust  Companies  in  writing  that  if  they  were 

to  legalize  Bank  ,  ,  ,  ^       r   ^^ 

Suspension.  solvent  they  need  not  make  full  payment  on 

checks   drawn  by  their  depositors,   and  that 

each  bank  might  decide  for  itself  whether  it  was  solvent  or 

not.     Similar  action  was  taken  by  the  public  authorities  in 

several  other  states,  but  generally  the  banks  did  not  wait 


THE   CLEARING-HOUSE   SYSTEM  229 

for  such  authorization.  Each  one  immediately  became  a 
law  unto  itself. 

In  two  thirds  of  the  cities  of  the  United  States,  of  more 
than  25,000  inhabitants  each,  restrictions  were  arbitrarily 
imposed  upon  depositors,  limiting  them  to  various  sums  to 
be  drawn,  such  as  $10  to  $50  per  day,  or  per  week,  or  per 
customer,  but  in  most  cases  the  amount  to  be  paid  was  dis- 
cretionary with  each  banker ;  that  is,  the  banker  could  pay 
some  customers  in  full  and  refuse  others,  or  cut  them  down 
to  any  percentage  he  pleased.  Only  fifty-three  cities  in 
the  United  States  of  the  size  mentioned  maintained  cash 
payments  without  any  restrictions.  The  total  amount  of 
clearing-house  certificates  reported  in  the  cities  of  this  size 
was  $330,066,223. 

In  most  cities  and  towns  substitutes  for  money  were  put  in 
circulation.  All  were  illegal.  Some  were  engraved  to  re- 
semble bank  notes  or  government  notes,  and 
CuTxen^^  ^^  these  were  doubly  illegal ;  some  were  as  small 

as  twenty-five  cents,  and  these  were  trebly 
illegal ;  some  were  in  the  form  of  postnotes,  which  are  pro- 
hibited by  law.  State  banks  issued  circulation  as  freely  as 
national  banks.  Upwards  of  twenty-three  millions  of  this  kind 
of  circulation  were  issued.  The  inscriptions  were  various. 
Some  were  made  payable  to  order,  some  to  bearer,  and  some 
"To  the  order  of  bearer."  They  were  issued  not  only  by 
banks,  but  by  any  kind  of  corporation.  The  Standard  Oil  Com- 
pany issued  them  in  small  denominations  in  New  York  City, 
drawn  on  the  National  City  Bank,  "  payable  to  the  order  of 
bearer."  In  Pittsburg  a  large  manufacturing  corporation 
drew  checks  for  $1  for  wages  payable  to  bearer,  with  these 
words  stamped  on  the  back  in  four  different  languages  :  ''This 
check  may  be  deposited,  but  will  not  be  paid  in  cash  by  the 
bank."  Many  of  the  poor  laborers  from  eastern  Europe  who 
received  these  things  tore  them  up  after  reading  them  and 


230  BANKING 

threw  away  the  pieces.  The  only  idea  conveyed  to  their  minds 
by  the  inscription  was  that  the  checks  would  not  be  paid. 

In  New  York  City  currency  was  sold  at  4  per  cent  pre- 
mium over  bank  checks.  Any  man  having  one  hundred 
dollars  cash  in  his  pocket  could  sell  it  for 
cash^"^^^™  °^  ^  check  for  one  hundred  and  four  dollars, 
stamped  "good  through  the  clearing  house." 
These  conditions  lasted  twenty-two  weeks  with  varying  in- 
tensity. In  1893  only  eight  cities  resorted  to  clearing-house 
certificates  for  settling  bank  balances.  In  1907  there  were 
forty-two  such.  In  the  latter  year  the  total  amount  of  certifi- 
cates issued  in  New  York  was  two  and  one-half  times  greater 
than  in  any  previous  panic,  in  Pittsburg  seven  times,  in  New 
Orleans  five  times,  in  Detroit  four  times,  in  Baltimore  two 
times,  and  in  the  whole  country  three  and  one-half  times 
greater.  In  1893  the  duration  of  the  suspension  was  nine- 
teen weeks;  in  1907  twenty-two  weeks.^ 

These  frequently  recurring  episodes  tend  to  deaden  the 
sense  of  commercial  honor.  Every  such  suspension  is  a 
license  to  every  financial  institution  to  scale  its  debts  or  to 
postpone  the  payment  of  them.  When  banks  thus  repudiate 
their  obligations  their  depositors  can  hardly  do  otherwise, 
and  thus  a  bad  education  is  disseminated  in  the  community. 
People  come  to  think  that  bank  suspensions  are  among  the 
dispensations  of  Providence  instead  of  being  the  signs  of  a 
defective  banking  system.^ 

RECAPITULATION 

Clearing  is  the  settlement  of  mutual  claims  by  the  pay- 
ment of  differences.  In  bank  clearings  the  clearing  house 
is  the  only  creditor  and  the  only  debtor  of  each  bank.     It 

1  See  article  entitled  "  Substitutes  for  Cash  in  the  Panic  of  1907,"  by 
A.  P.  Andrew,  in  the  Quarterly  Journal  of  Economics,  August,  1908. 

2  This  subject  will  be  further  treated  in  Chapters  XVIII  and  XX. 


THE    CLEARING-HOUSE    SYSTEM  23 1 

ascertains  the  amount  of  each  bank's  balance,  receives  the 
money  due  from  the  debtor  banks,  and  distributes  it  to 
the  creditor  banks.  The  clearing  house  is  a  labor-saving 
machine  ;  ajid  it  makes  little  difference,  as  regards  the  time 
and  labor  involved,  whether  the  number  of  banks  and  the 
amount  of  claims  adjusted  be  large  or  small. 

Clearing  is  susceptible  of  application  to  other  kinds  of 
business  than  that  of  banks.  There  is  a  railway  clearing 
house  in  London,  for  the  settlement  of  balances  of  railway 
earnings.  There  is  a  stock  exchange  clearing  house  in 
London,  and  one  in  New  York,  for  settling  differences  be- 
tween stockbrokers.  There  was  a  gold  exchange  bank  in 
New  York  during  the  suspension  of  specie  payments,  which 
operated  as  a  clearing  house  for  dealers  in  that  metal. 

A  clearing-house  association,  as  an  organization  of  banks, 
is  well  fitted  for  other  tasks  besides  settling  balances  with 
each  other.  It  has  been  especially  useful  in  calming  the 
public  mind  in  times  of  financial  panic.  This  it  has  accom- 
plished by  combining  the  cash  reserves  of  all  the  banks, 
putting  them  under  the  control  of  a  committee,  and  issuing 
loan  certificates  for  the  payment  of  balances  at  the  clearing 
house.  By  this  means  the  banks  lend  to  each  other  their 
cash  reserves,  according  to  the  discretion  of  the  committee. 
The  repayment  of  the  loans  is  secured  by  the  bills  receiv- 
able, or  other  assets,  of  the  borrowing  banks. 

Authorities 

Cannon's  The  Clearing  House. 
Bolles'  Practical  Banking. 
Gibbons'  Banks  of  New  York. 
Gilbart's  Principles  a?td  Practice  of  Bankiftg. 
H.   D.   Lloyd's  article  on  "  Clearing  and  Clearing  Houses,"  in 
Lalor's  Cyclopedia  of  Political  Science. 


CHAPTER   IV 
COLONIAL  BANKING 

A  PUBLIC  bank  in  the  American  colonies,  as  we  have 
seen,  was  an  emission  of  circulating  notes  by  a  provincial 
government,  with  a  promise  of  redemption  of 
ofB^nkiig!^^  the  same  from  the  proceeds  of  taxation  at  a 
fixed  time.  A  private  bank  was  an  emission 
of  notes  by  private  persons,  to  supply  a  supposed  deficiency 
of  the  medium  of  exchange.  In  some  cases  there  was  a 
specific  promise  of  redemption  of  such  notes.  In  others 
there  was  merely  an  agreement  among  the  subscribers  to 
accept  them  in  trade.  According  to  the  latter  plan  it  was 
not  necessary  that  a  bank  should  have  any  capital,  but 
merely  that  it  should  have  the  means  of  putting  its  notes  in 
circulation.  Consequently  the  subscribers  to  the  undertak- 
ing did  not  agree  to  pay  money  into  the  bank,  but  to  take 
out  and  keep  out  a  quantity  of  the  note  issues  proportioned 
to  their  subscriptions,  and  to  accept  the  same  in  trade  as 
the  equivalent  of  money.  As  security  for  the  fulfillment  of 
this  promise,  and  for  the  ultimate  redemption  of  the  notes 
in  money  or  goods,  they  gave  mortgages  of  land  to  the  asso- 
ciation of  which  they  were  members.  The  association  was 
both  a  lending  and  a  trading  company.  It  bought  goods 
with  its  notes,  or  loaned  the  notes  at  interest  on  the  security 
of  land  or  personal  property. 

The  current  ideas  of  banking  were  derived  from  England, 
and  more  remotely  from  the  continent  of  Europe.  The 
Bank  of  Amsterdam  was  established  by  the  city  government 

232 


COLONIAL  BANKING  233 

of  that  place  in  1609,  for  the  purpose  of  maintaining  the 
true  standard  of  value  in  commercial  transactions.      The 

coins  then  in  circulation  were  not  of  uniform 
A^^f^d^^*         goodness.      Some   were   worn    by   long   use, 

others  were  mutilated,  many  were  produced 
by  private  mints.  They  were  of  almost  countless  variety 
and  were,  on  the  average,  about  9  per  cent  below  their 
nominal  value.  The  Bank  of  Amsterdam  served  both  as 
an  assay  office  and  as  a  place  of  deposit.  All  sorts  of  coins 
were  received  from  depositors  and  their  weight  and  fineness 
determined,  and  the  depositors  were  allowed  to  draw  out 
for  their  own  use,  or  to  transfer  to  others,  the  true  value  in 
standard  money,  or  in  "bank  money,"  as  it  was  commonly 
called.  All  bills  of  exchange  payable  in  Amsterdam  were 
required  by  law  to  be  paid  in  bank  money.  Transfers  of 
such  money  were  at  first  made  by  the  payer  to  the  payee 
personally  in  the  bank,  but  this  method  was  afterward  super- 
seded by  orders  in  writing ;  and  here,  perhaps,  we  find  the 
origin  of  the  bank  check. 

The  lesson  which  had  been  learned  in  England  from  the  con- 
tinental banks  in  the  first  half  of  the  seventeenth  century  was  that 
if  the  degraded  coin  then  in  circulation  should  be  deposited  in  a 
bank  and  an  equivalent  credit  in  terms  of  standard  coin  be  given 
depositors,  such  credits  could  be  made  use  of  in  the  adjustment 
of  debts  by  transfers  of  account  at  the  bank.  The  idea  of  mak- 
ing a  bank  thus  act  as  a  clearing  house  for  the  nation,  through 
the  deposit  in  its  vaults  of  all  the  current  coin,  and  its  conversion 
into  bank  credits,  soon  led  to  propositions  to  comprehend  goods 
and  merchandise  with  coin  in  the  establishment  of  bank  credits. 
This  was  naturally  followed  by  the  argument  that  land,  being 
stable  and  unperishable,  was  even  better  for  the  purpose  than 
coin  or  goods.^ 

1  Currency  and  Banking  in  the  Province  of  Massachusetts  Bay,  by 
Andrew  McFarland  Davis,  Part  II,  "Banking"  (1901). 


234  BANKING 

The  assumption  that  giving  security  for  the  ultimate  pay- 
ment of  a  paper  currency  is  the  same  thing  as  providing  for 
its  redemption  at  any  time,  or  that  it  will  answer  the  same 
purpose,  is  a  pernicious  fallacy.  It  confounds 
Land  Bankhig  ^^^  promise  to  pay  money  with  money  itself. 
The  promise  to  pay  is  of  full  face  value  only 
where  there  is  certainty  of  its  fulfillment  at  the  demand  of 
the  holder.  Security,  on  the  other  hand,  implies  payment 
at  some  future  indefinite  time;  and,  where  land  is  the 
security,  the  time  is  usually  remote.  A  paper  currency 
must  be  promptly  redeemable  in  coin.  No  kind  of  security, 
not  even  that  of  government  bonds,  is  a  good  substitute  for 
such  redemption.  Yet  the  idea  of  "basing"  currency  on 
various  kinds  of  property,  and  especially  on  land,  has  had 
many  advocates  ;  and  many  experiments  —  invariably  end- 
ing in  disaster  —  have  been  made  with  currency  of  this  kind. 

This  idea  found  lodgment  on  our  shores  in  the  latter  part 
of  the  seventeenth  century.  In  September,  1681,  there  was 
"The  Fund  at  established  in  the  colony  of  Massachusetts 
Boston  in  New  Bay  a  company  called  "  The  Fund  at  Boston 
England."  -^^  ^^^^  England,"  whose  object  was  to  facili- 

tate the  transfer  of  property  and  credits  among  the  members 
by  book  entries  at  the  head  office.  The  basis  of  the  Fund 
consisted  of  mortgages  conveying  to  the  trustees  certain  real 
estate  to  be  held  by  them  for  the  purposes  designated  in  the 
articles  of  association.  To  each  mortgageor  was  given  a  cor- 
responding credit  which  he  could  transfer  to  any  other  member 
in  the  form  of  a  "  change  bill "  for  any  debt,  purchase,  or  obliga- 
tion. Our  knowledge  of  this  institution  is  very  slender,  being 
limited  to  one  mutilated  pamphlet  and  a  few  mortgages  in  the 
Suffolk  Registry  of  Deeds  for  the  years  1681  and  1682.^ 

1  See  essay  on  "  The  Fund  at  Boston  in  New  England  "  by  Andrew 
McFarland  Davis,  in  Proceedings  of  the  American  Antiquarian  Society, 
April  29,  1903. 


COLONIAL  BANKING  235 

This  was  followed  in  1714  by  a  more  elaborate  scheme 

of  private  banking  entitled   "  A  Projection  for  erecting  a 

Bank  of  Credit  in  Boston,  New  England,  founded  on  Land 

Security."     The  preamble  recited  that  there  was  a  sensible 

decay  of  trade  for  want  of  a   medium  of  exchange.     To 

supply  this  deficiency  certain  parties  proposed  to  subscribe 

^300,000,  every  subscriber  agreeing  to  "settle  and  make 

over  real  estate  to  the  value  of  his  respective  subscription, 

to  the  trustees  of  the  partnership  or  bank,  to 

T  e  Projec-  ^^  ^^^  remain  as  a  fund  or  security  for  such 
tion  "  of  1714.  J 

bills  as   shall  be  emitted  therefrom."     Each 

subscriber  was  pledged  to  give  the  same  credit  to  the  bills 
as  to  those  of  the  province,  and  to  accept  them  in  all  pay- 
ments, "upon  forfeiture  of  ;^5o  for  each  refusal  until  the 
refuser  has  forfeited  his  whole  security  and  profits."  Loans 
of  the  bills  might  be  made  on  "ratable  estates,"  to  the 
amount  of  two-thirds  of  their  value ;  on  "  iron  or  other 
unperishable  commodities,  as  a  pledge,  for  one-half  or 
two-thirds  according  to  the  market."  Each  subscriber  was 
obligated  to  take  out,  and  keep  out  for  two  years,  notes 
of  the  bank  equal  to  at  least  one-fourth  part  of  the  amount 
of  his  subscription ;  but  he  could  transfer  this  obligation,  or 
privilege,  to  any  other  person  on  the  books  of  the  bank. 
All  loans  were  to  bear  5  per  cent  interest, 
tfo^n?  ^°°*^®^"  The  form  of  the  notes  contained  no  promise 
to  pay,  but  merely  the  pledge  of  the  sub- 
scribers  to   "  accept  the   same  in   lieu  of shillings   in 

all  payments  "  and  the  pledge  of  the  bank  to  accept  them 
"for  the  redemption  of  any  pawn  or  mortgage  in  the  said 
bank." 

The  "  Projection "  led  to  a  controversy  which,  the  his- 
torian Hutchinson  says,  "had  an  universal  spread  and  divided 
towns,  parishes  and  particular  families."  Paul  Dudley,  the 
Attorney-General,  attacked  it  on  legal  grounds!    No  process 


236  BANKING 

was  indicated  by  which  any  holder  could  compel  any  sub- 
scriber to  receive  the  notes  as  the  equivalent  of  silver  money 
in  goods,  nor  was  there  any  provision  for  fixing  the  price  of 
the  goods.  The  General  Court  disapproved  of  the  scheme 
and,  in  order  to  create  a  division  in  the  ranks  of  its  support- 
ers, passed  a  new  loan  act  for  ^50,000  of  colonial  bills  of 
credit.  "This,"  says  Hutchinson,  "lessened  the  number  of 
the  party  for  the  private  bank  but  it  increased  the  zeal  and 
raised  a  strong  resentment  in  those  which  remained." 

Following  this  attempt,  and  evidently  patterned  on  it,  was 
a  company  formed  in  Connecticut  in  1732  under  the  name 

of  the  New  London  Society  United  for  Trade 
lllklTi^Z^'"''    and    Commerce.      A  petition    for  a   charter, 

addressed  to  the  colonial  assembly  in  1729 
by  Solomon  Coit  in  behalf  of  the  company,  asked  among 
other  things  that  the  company  be  allowed  to  "  emit  bills  for 
currency  upon  our  own  credit  as  we  may  see  occasion  at 
any  time,  for  promoting  or  maintaining  our  trade  "  and  that 
the  penalties  for  counterfeiting  the  bills  should  be  the  same 
as  for  counterfeiting  those  of  the  province.-^  The  petition 
was  refused,  for  the  reason,  evidently,  that  the  assembly 
was  not  willing  to  grant  to  a  private  company  the  power  to 
issue  bills  of  credit  as  currency.  Three  years  later  a  char- 
ter was  granted  to  the  New  London  company  without  the 
power  to  issue  bills,  but  the  company  immediately  passed 
a  vote  to  issue  ;^3 0,000  of  bills  and  began  to"  put  them  in 
circulation  by  buying  goods  from  persons  who  were  willing  to 
take  them.  The  bills  recited  on  their  face  that  they  should 
be  "  equal  in  value  to  silver  at  sixteen  shillings  per  ounce, 
or  to  bills  of  publick  credit  of  this  or  the  neighboring 
governments."  There  was  no  promise  that  money  or  any- 
thing should  be  paid  for  them,  but  merely  that  they  should 
be  accepted  by  the  treasurer  of  the  society  "and  in  all 

1  Davis,  Bankingy  p.  105. 


COLONIAL  BANKING  237 

payments  in  said  society  from  time  to  time."  The  society 
had  no  capital,  but  the  members  had  executed  mortgages  of 
land  which  were  supposed  to  secure  the  holders  of  the  notes. 
The  bills  of  the  New  London  company  were  eagerly 
accepted  in  trade;   but,  as  soon  as  the  fact  of  their  issue 

came  to  the  knowledge  of  Governor  Talcott, 
luppressed"'^        he  took  Steps  to  suppress  them.    The  colonial 

assembly  was  called  together  to  consider  the 
subject.  It  declared  that  it  was  not  legal  for  private  per- 
sons to  emit  bills  of  credit  to  circulate  as  money  without 
authority  from  the  government,  and  it  repealed  the  charter 
of  the  New  London  company  for  violation  of  its  provisions 
—  particularly  because  it  had  no  capital  paid  in,  as  the 
charter  contemplated,  but  only  mortgages  as  a  basis  of  its 
trading  operations.  The  company  was  accordingly  dissolved, 
and  the  legislature  made  an  issue  of  colonial  bills  of  credit 
with  which  to  redeem  the  company's  bills,  taking  the  mort- 
gages in  the  hands  of  the  company's  treasurer  to  reimburse 
the  government. 

Rhode   Island  in   1731    struck  terror  into  the  business 
communities  of  Massachusetts  and  Connecticut  by  a  "  new 

bank,"  with  an  issue  of  ;^i  00,000  in  bills  of 

Private  Note         credit  as   loans   to   individuals.     An  attempt 
Issues  m  1731.  ^ 

was  made  in  Massachusetts  to  forestall  this 

issue  by  an  agreement  of  the  leading  citizens  not  to  accept 

them  in  trade.     In  order,  at  the  same  time,  to  preoccupy 

the  field  of  circulation,  a  number  of  Boston  merchants  of 

high  standing  formed  a  partnership  and   issued  ^110,000 

of  notes  intended  for  general  circulation.     They  were  issued 

as  loans  at  interest,  repayable  in  notes  of  the  same  kind, 

or   in   coined   silver   of   specified  weight  and  fineness,   at 

diiferent  periods  during  the  next  ten  years.     The  details  of 

the  issue  are  interesting,  but  the  only  fact  of  importance 

now  is  that  this  was  an  attempt  to  drive  out  a  bad  currency 


238  BANKING 

by  issuing  a  better  one  to  take  its  place.  The  result  was 
in  strict  accord  with  Gresham's  Law.  The  Rhode  Island 
bills  came  in,  despite  the  efforts  made  to  keep  them  out. 
They  caused  a  further  depreciation  of  the  currency.  The 
merchants'  notes,  which  had  a  fixed  value  in  silver  and  were 
supported  by  the  credit  of  wealthy  and  well-known  citizens, 
commanded  a  premium  and  were  consequently  hoarded. 

This  kind  of  banking  found  imitators  in  the  Province 
of  New  Hampshire.     In   1735   a  number  of    merchants  in 

Portsmouth  formed  a  partnership  and  issued 
Ex^erimenT^^^''^  "°^^^   ^^  various   denominations,   payable   in 

ten  years  "  in  silver  or  gold  at  the  then  cur- 
rent price."  The  only  important  fact  about  this  bank  is 
that  the  assembly  of  Massachusetts  passed  an  act  to  pro- 
hibit the  circulation  of  these  notes  in  the  latter  province, 
and  that  the  Lords  of  Trade  in  London  disallowed  it,  on 
the  ground  that,  since  nobody  was  obliged  to  take  them,  "  it 
would  be  a  great  hardship  to  set  a  public  mark  of  discredit 
upon  the  persons  engaged  in  this  undertaking."  In  other 
words,  the  Lords  of  Trade  recognized  the  fact  that  the  issue 
of  notes  by  private  persons  to  circulate  as  money  was  per- 
missible, provided  they  were  not  made  legal  tender. 

The  next  attempt  to  establish  a  bank  in  Massachusetts, 
and  the  one  most  disastrous  to  the  projectors,  was  made  in 

1740  under  the  name  of  the  "Land  Bank  or 
^f^'^^^^°^  ^^°^      Manufactory  Scheme."  '    It  was  an  outgrowth 

of  the  ideas  which  gave  birth  to  the  "  projec- 
tion" of  1714  and  to  the  New  London  Bank  of  1732.  The 
prospectus  was   published   as  a  broadside  on  the   loth  of 

^  See  "A  letter  to  a  merchant  in  London  concerning  a  late  combina- 
tion in  the  Province  of  Massachusetts  Bay  in  New  England  to  Impose 
or  Force  a  Private  Currency  called  Land  Bank  Money;  printed  for  the 
publick  Good,  1741."  This  pamphlet  is  anonymous,  but  Mr.  A.  McFar- 
land  Davis  says  that  it  was  written  by  Dr.  William  Douglass.  The  style 
certainly  resembles  that  of  Douglass. 


COLONIAL   BANKING  239 

March,  1739-40.  It  proposed  to  found  a  bank  with  a  capi- 
tal stock  of  ";^i 50,000  lawful  money"  but  did  not  provide 
for  paying  in  any  money,  except  4sr  on  each  ^1000,  to 
meet  the  expenses  of  organization.  Each  subscriber  was 
to  "  make  over  an  estate  in  lands  "  to  the  satisfaction  of  the 
■directors  and  pay  3  per  cent  interest  for  the  same,  either  in 
the  bills  of  the  company  or  in  various  manufactured  articles, 
the  produce  of  the  provinces.  The  list  of  things  so  receiv- 
able included  hemp,  flax,  cordage,  iron,  wool,  beeswax, 
tallow,  cord  wood,  and  a  dozen  others,  at  prices  to  be  fixed 
by  the  directors.  Five  per  cent  of  the  principal  of  the 
subscription  was  to  be  paid  each  year  in  the  same  articles 
or  in  said  bills.  The  form  of  the  bills  was  appended  to 
the  prospectus,  thus  : 

Twenty  Shillings. 

We  promise  for  ourselves  and  partners  to  receive  this  twenty 
shilling  bill  of  credit  as  so  much  lawful  money  in  all  payments, 
trade  and  business,  and  after  ye  expiration  of  twenty  years  to  pay 
ye  possessors  ye  value  thereof  in  ye  manufactures  of  this  province. 

The  wording  of  the  bills  was  subsequently  changed  to  the 
following  form : 

We  jointly  and  severally  promise,  for  ourselves  and  partners, 
to  take  this  bill  as  lawful  money  at  six  shillings  eight  pence  per 
ounce  in  all  payments,  trade  and  business  and  for  stock  in  our 
treasury  at  any  time ;  and  after  twenty  years  to  pay  the  same  at 
that  estimate  on  demand  of  Mr.  Joseph  Marion,  or  orders  in  the 
produce  or  manufactures  enumerated  in  our  scheme,  for  value 
received. 

Although  no  method  of  issuing  notes  was  described  in 
the  prospectus,  it  was  understood  that  the  capital  stock  of 
;^i5o,ooo  was  to  consist  of  bits  of  paper  of  the  foregoing 
tenor,  to  be  divided  among  the  subscribers  in  proportion  to 
their  subscriptions,  and  that  they  were  to  buy  goods  with 


240  BANKING 

them,   subject   to   the   condition   that    they   should   accept 

them  in  trade,  at  the  rate  of  6^.  2>d.  per  ounce  of  silver  — 

a  phrase  which,  in  the  absence  of  any  fixed 
Its  Note  Issue. 

prices   for   the   goods  traded   in,   was    quite 

meaningless.  But  even  if  this  had  been  a  solvent  specie- 
paying  bank,  the  net  result  would  have  been  a  donation 
of  the  face  value  of  the  notes  by  the  public  to  the  bankers, 
without  any  return  whatever,  since  the  notes  were  payable 
only  at  the  end  of  twenty  years,  and  the  prevailing  rate 
of  interest  was  5  per  cent.  At  least  one  thousand  men 
of  Massachusetts  saw  this  prospect  of  gain,  for  fully  that 
number  subscribed  for  shares  in  the  "  Land  Bank  or  Manu- 
factory Scheme."     These  men  had  large  political  influence. 

They  soon  acquired  a  majority  in  the  House 
SorBe°icher.  °f    Representatives,    but    Governor    Belcher 

and  the  Council  were  bitterly  opposed  to  the 
project.  The  governor  issued  a  proclamation  against  it 
and  cautioned  all  persons,  especially  all  ofhce  holders,  against 
receiving  the  bills  of  the  Land  Bank,  saying  that  they  tended 
to  defraud  people  of  their  property. 

Notwithstanding  this  opposition,  the   Land  Bank  began 
to  issue  its  bills  in    September,   1740.     Their  appearance 

in  business   circles   caused   much  anxiety  in 

Political  Con-  gogton,  whose  merchants  could  not  fail  to  see 
sequences.  ' 

the  mischievous  and  unsubstantial  nature  of 

the  scheme.  One  hundred  and  fifty  of  them  signed  an  agree- 
ment that  they  would  not  take  the  Land  Bank  bills  on  any 
terms  or  countenance  their  use  in  any  way.  The  Land  Bank 
now  became  the  great  issue  of  the  day,  overshadowing  every 
other.  Governor  Belcher  removed  from  office  several  persons 
who  favored  the  bank  after  he  had  issued  his  proclamation 
against  it.  Many  others  tendered  their  resignations,  among 
them  Samuel  Adams,  Sr.  The  directors  of  the  Land  Bank 
sent  a  copy  of  their  articles  of  association  to  the  Council  for 


COLONIAL  BANKING  24I 

record.     The  Council  ordered  the  secretary  not  to  receive  it 

and  voted  that  the  presentation  of  it  was  an  indignity. 

That  the  Land  Bank  was  legal,  in  the  absence  of  any 

prohibition  by  the  General  Court,  does  not  admit  of  doubt. 

Governor  Belcher,  the  Council,  and  the  Boston 

Parliament  merchants  knew  this.     They  knew  also  that 

takes  Action.  •' 

they  could   not  get  the   lower  house  to  join 

with  the  Council  in  prohibiting  it.  So  they  turned  to 
Parliament,  and  here  they  were  more  successful.  On  the 
27th  of  March,  1741,  the  House  of  Commons  passed  an 
act  extending  the  provisions  of  the  so-called  Bubble  Act  of 
1720  to  the  American  colonies.  The  latter  act  had  been 
passed  in  order  to  prohibit  the  transaction  of  business  by 
joint  stock  companies  without  special  authority  of  statute, 
and  it  imposed  severe  penalties  upon  those  who  should  do 
so.  It  was  applicable  only  to  the  United  Kingdom ;  yet 
Parliament  now  declared  that  it  "  did,  does  and  shall  extend 
to  America,"  and  in  the  preamble  it  referred  expressly  to 
the  Land  Bank  as  one  of  the  offenders  against  it.  This 
was  ex  post  facto  legislation,  based  upon  historical  untruth. 
Not  only  had  the  Lords  of  Trade,  in  the  New  Hampshire 
case  cited  above,  refused  to  put  the  stamp  of  illegality  upon 
a  bank  in  the  colonies,  but  the  Attorney-General  in  1735  had 
declared  in  an  official  communication  that  there  was  no 
objection  in  point  of  law  to  a  land  bank  at  that  time  pro- 
jected "at  Boston  in  the  Massachusetts  Bay." 

Before  the  news  of  the  act  of  Parliament  reached  Boston 
the  bills  of  the  Land  Bank  had  been  somewhat  discredited 
by   reason    of   the    refusal  of   the   principal   merchants   of 

„  ^    .  Boston  to  touch  them.     Their  action  caused 

Mob  Violence. 

great  exasperation  in  the  rural  districts,  and  a 

movement  was   started  to  use  mob  violence  against  them. 

Governor  Belcher  received  information  of  the  intended  riot 

and  sent  the  sheriff  to  arrest  the  leaders  of  it. 


242  BANKING 

The  Land  Bank  men,  in  order  to  get  their  notes  in  circu- 
lation, had  bought  any  kind  of  goods  for  which  the  owners 
would  accept  the  notes  in  payment,  and  at  such  prices  as 
the  individual  traders  could  agree  upon.  There  was  noth- 
ing like  a  uniform  price  of  goods  so  bought.  Now  the 
Bubble  Act  altered  the  terms  of  these  private  contracts  by 
giving  the  holders  of  the  notes  an  immediate  right  of  action 
against  every  partner  for  their  face  value.  Many  of  the 
shareholders  were  ruined.  Some  of  them  withdrew  to  the 
neighboring  colonies  where  they  could  not  be  reached,  leav- 
ing a  heavier  burden  upon  others.  The  affairs  of  the  Land 
Bank  occupied  the  attention  of  the  General  Court  for  a 
quarter  of  a  century,  and  the  litigation  growing  out  of  its 
affairs  was  protracted  till  1767  or  later.^ 

No  step  taken  by  the  mother  country  in  reference  to  the 
colonies  was  more  maladroit  than  this.  No  other,  not  even 
the  Stamp  Act,  caused  greater  bitterness.  It  was  also  quite 
unnecessary,  for  the  Land  Bank  was  doomed  to  an  early 
death  by  its  inherent  vices.  Its  weakness  had  already  been 
manifested  in  the  early  return  of  its  bills  to  the  company's 
treasurer  and  to  individual  members,  to  be  exchanged  for 
tangible  property,  lest  they  should  fall  in  value.  Just  as  it 
was  beginning  to  totter  by  reason  of  its  own.  feebleness  the 
British  government  gave  it  an  annihilating  blow.  All  the 
educating  and  helpful  influence  that  would  have  followed 
from  a  natural  demise  was  lost,  and  in  its  place  was  planted 
an  undying  animosity  toward  the  mother  country  for  an  act 
of  glaring  injustice.  Massachusetts  was  nearly  ripe  for 
revolution  in  1741. 

1  The  history  of  the  Land  Bank  of  1740,  down  to  the  smallest  minu- 
tiae, is  given  by  Mr.  A.  McFarland  Davis  in  the  volume  cited  on 
page  233. 


COLONIAL   BANKING 


RECAPITULATION 


243 


The  principles  of  banking  are  the  outgrowth  of  experi- 
ment. They  must  be  learned  from  the  history  of  banking, 
and  particularly  from  the  laws  that  have  been  enacted  from 
time  to  time.  These  laws  are  the  crystallization  of  ideas 
dominant  at  given  periods. 

The  earliest  ideas  of  banking  in  the  American  colonies 
were  drawn  from  the  mother  country,  and,  more  remotely, 
from  the  continent  of  Europe.  The  commonest  conception 
of  a  private  bank  in  New  England  was  that  of  a  company 
or  partnership  formed  to  supply  circulating  notes  as  a 
medium  of  exchange,  in  addition  to  the  bills  of  credit  of  the 
colonial  governments.  It  was  believed  that,  if  such  notes 
were  bottomed  on  landed  security,  current  redemption  would 
not  be  necessary.  In  this  view  no  capital  was  required  for 
the  starting  of  a  bank,  but  merely  confidence.  Several 
attempts  were  made  to  establish  banks  and  to  supply  a 
medium  of  exchange  on  this  theory,  but  the  experiments 
were  always  checked  or  suppressed  by  the  colonial  or  the 
home  government  before  the  ultimate  economic  results  had 
manifested  themselves. 

Authorities 

Dr.  Wm.  Douglass'  Discourse  concerning  the  Currencies  of 
the  British  Colofties  in  America. 

Hutchinson's  History  of  Massachusetts  from  1628  to  1774. 

Felt's  Historical  Account  of  Massachusetts  Currency. 

Trumbull's  The  First  Essays  at  Banking  and  the  First  Paper 
Money  in  New  Eiigland. 

C.  H.  J.  Douglas'  Financial  History  of  Massachusetts. 

Davis'  History  of  Currency  and  Banking  in  the  Province  of 
Massachusetts  Bay :  Vol.  II,  "Banking." 


CHAPTER   V 

EARLY  AMERICAN  BANKS 

The  first  bank  jn  the  United  States  was  the   Bank  of 
North  America,  at  Philadelphia.     It  was  planned  and  put 

in  operation  in  1781  by  Robert  Morris,  the 
Americi.^°'^^       Superintendent  of  Finance  of  the  Revolution, 

in  order  to  give  financial  support  to  Washing- 
ton's army.  It  had  been  preceded  by  a  so-called  "  Bank  of 
Pennsylvania,"  which  was  a  private  subscription  of  money, 
not  for  the  sake  of  profit,  but  to  supply  rations  for  the  army 
when  the  Continental  currency  was  becoming  worthless. 

Morris  conceived  that  a  bank  with  a  paid-up  capital,  on  a 
specie  basis,  and  in  high  credit,  "would  have  the  interest 

of  a  stock  two  or  three  times  larger  than  that 
Congress^in^78i     which  it  really  possessed."     By  this  he  meant 

that  it  could  lend  its  credit,  and  receive  inter- 
est therefor,  to  an  amount  two  or  three  times  larger  than 
its  cash  on  hand,  —  a  sound  conception.  The  project  was 
approved  by  Congress,  which  granted  a  charter  to  the  bank 
on  May  26,  1781.  The  great  difficulty  was  to  secure  the 
necessary  subscription.  The  capital  stock  was  fixed  at 
$160,000,  with  power  to  increase  it,  but  only  $70,000  was 
subscribed  in  the  first  four  months.  Fortunately  a  French 
frigate  arrived  at  Boston  in  September,  bringing  $462,862  in 
specie  to  the  government.  Morris  brought  it  in  wagons  to 
Philadelphia  and  lodged  it  in  the  bank.  He  then  increased 
the  capital  stock  to  $400,000  and  made  a  subscription  of 
$250,000  thereto  for  the  government,  paying  in  $200,000  of 

244 


EARLY  AMERICAN   BANKS  245 

the  amount.  This  brought  financial  support  to  the  bank 
from  private  sources  and  gave  it  immediate  credit,  through 
which  it  was  enabled  to  make  large  advances  to 
RevoiSon'"^*^^  the  government,  besides  doing  a  considerable 
business  in  the  discount  of  commercial  paper. 
Morris'  anticipations  were  fully  realized.  The  troops  were 
regularly  fed,  clothed,  and  paid ;  industry  revived ;  the  bank's 
notes  were  redeemed  in  specie  on  demand  ;  and  it  was  found 
that  there  was  no  lack  of  a  circulating  medium.  This  magi- 
cal transformation  took  place  after  the  Continental  currency 
had  disappeared,  and  largely  because  of  its  disappearance. 

Doubts  existed  whether  Congress  had  the  power,  under 
the  Articles  of  Confederation,  to  charter  a  bank.     Conse- 
quently, the  Bank  of  North  America  sought 

^f^^o'^^ll^y      and  obtained  another  one  from  the  legislature 
Pennsylvania .  ° 

of  Pennsylvania.  After  the  termination  of  the 
war  the  bank  became  very  prosperous,  paying  dividends 
of  14  per  cent  per  annum.  These  gains  prompted  the 
starting  of  another  bank  in  Philadelphia ;  but  the  Bank  of 
North  America  offered  to  enlarge  its  capital  and  take  in  the 
subscribers  to  the  new  bank,  and  the  offer  was  accepted. 

Morris  had  remarked  in  1784  that  the  bank  had  created 
a  habit  of  punctuality  in  the  payment  of  debts  and  that 

everybody  felt  the  benefit  of  it,  —  meaning 

Attacks  on  the       everybody  who  was  in  good  credit.     These, 
Bank  after  the        ,         ^         "^  ^        ^  ,     .  .      .  ' 

■V7ar.  however,  were  far  from  bemg  a  majority  of 

the  people.  Complaints  were  made  to  the 
legislature  that  the  bank  was  guilty  of  favoritism,  extortion 
and  harshness  to  debtors,  and  that  it  tended  to  destroy  that 
equality  which  ought  to  exist  in  a  commercial  country.  A 
petition  embodying  these  and  other  accusations  was  pre- 
sented from  citizens  of  Chester  County,  with  a  hint  that 
bills  of  credit  issued  by  the  state  would  be  more  beneficial 
than  bank  notes.     This  meant  that  bills  of  credit  would  be 


246 


BANKING 


distributed  according  to  population  or  political  influence, 
whereas  bank  loans  were  at  the  service  only  of  men  who 
could  repay  them  at  maturity. 

The  legislature  took  the  matter  into  consideration  and 
appointed  a  committee  "  to  inquire  whether  the  bank  estab- 
lished at  Philadelphia  was  compatible  with  the  public  safety 
and  that  equality  which  ought  ever  to  prevail  between  the 
individuals  of  a  republic."  This  idea,  that  the  business  of 
banking  savors  of  aristocracy  and  tends  to  the  overthrow 
of  free  institutions,  had  a  strong  hold  on  the  public  mind 
in  the  early  years  of  the  republic  ^  and  has  not  yet  wholly 
disappeared,  although  it  has  undergone  some  modifications. 
The  legislature  of  Pennsylvania  was  so  far 
^e^eaied^^'^  convinced  of  the  tendency  of  banks  to  pro- 

duce inequality  among  citizens  that  it  repealed 
the  charter  of  the  Bank  of  North  America  on  September  3, 
1785,  within  three  years  of  the  time  when  it  had  rendered  ines- 
timable services  to  the  patriot  cause.  The  bank  protested 
that  the  charter  was  irrepealable  and  continued  its  business, 
but  took  steps  to  obtain  a  charter  from  Delaware,  with  the 
intention  of  transferring  itself  to  Wilmington.  Such  a  charter 
was  granted  early  in  1786.  Then  Pennsylvania,  fearing  lest 
it  should  lose  the  bank,  in  1787  granted  it  a  new  charter 
which  was  renewed  from  time  to  time  and  under  which  it 
continued  till  the  national  banking  law  was  passed.  It 
declined  at  first  to  enter  the  national  system,  because,  under 
the  rules  adopted  by  Secretary  Chase,  it  would  have  been 
obliged  to  change  its  name.  But  a  dispensation  was  granted 
to  it,  on  account  of  its  illustrious  origin,  to  come  in  without 

1  "  Pope,  of  Kentucky,  in  the  debate  of  181 1,  said  that  the  Virginians 
were  known  to  be  very  poor  financiers,  '  for  they  were,  a  few  years  since, 
frightened  at  the  very  name  of  a  bank.  ...  It  required  all  the  eloquence 
of  [Brent  of  Virginia]  to  persuade  the  Legislature  that  the  little  Bank  of 
Alexandria  would  not  sweep  away  their  liberties.'  " —  Sumner,  History 
of  Banking  in  the  United  States,  p.  20. 


EARLY   AMERICAN    BANKS  247 

such  change.      The    Bank  of   North  America  is  now  one 
hundred  and  twenty-seven  years  old,  and  has  passed  its  semi- 
annual dividend  only  five  times.    The  benefit 
And  reenacted.        .    .  c  ^  ^  ^ 

It  has  conferred  upon  the  country,  by  settmg 

an  example  of  sound  principles  and  practice  in  banking,  is 
second  only  to  its  patriotic  service  in  the  Revolution  ;  and 
for  both  we  are  indebted  to  Robert  Morris,  although  he  was 
never  president  or  even  a  director  of  the  bank.^ 

Ordinarily  it  would  not  be  good  banking  practice  to 
advance  large  sums  of  money  to  the  government  or  to  have 
the  government  for  a  shareholder  of  the  bank,  but  both  of 
these  features  were  necessities  in  the  case  of  the  Bank  of 
North  America.  Within  the  limits  thus  imposed,  the  bank 
was  conducted  in  a  businesslike  manner.  The  government 
paid  interest  and  principal  on  its  loans  like  a  private  bor- 
rower, and  received  dividends  on  its  shares  like  a  private 
stockholder.  It  ceased  borrowing  and  sold  its  shares  as 
soon  as  possible. 

Next  in  point  of  time  was  the  Bank  of  Massachusetts.  Its 
charter,  granted  by  the  legislature  on  February  7,  1784,  con- 
tained no  restrictions  or  conditions  except  the 
fhus^tts^^^^^"  ^^S^t  of  the  legislature  to  examine  its  affairs. 
No  mention  was  made  of  circulating  notes, 
since  the  right  to  issue  them  was  thought  to  be  embraced 
in  the  right  to  be  a  bank,  though  a  subsequent  law  was 
passed  by  the  same  legislature  to  punish  persons  who  should 
counterfeit  the  notes.  The  first  restrictions  on  the  bank 
were  imposed  by  a  law  passed  in  1792.  These  were:  (i) 
that  the  bank  should  not  issue  notes  smaller  than  $5.00; 
(2)  that  the  outstanding  notes  and  loans  should  not  exceed 

1  A  History  of  the  Bank  of  North  America  down  to  1882  has  been 
written  by  Lawrence  Lewis,  Jr.  An  interesting  account  of  its  origin 
and  early  years  is  given  in  Sumner's  Financier  and  Finances  of  the 
American  Revolution. 


248  BANKING 

double  the  amount  of  the  capital  stock  actually  paid  in  ; 
(3)  in  case  of  violation  of  this  law,  the  directors  were  made 

personally  liable  for  the  debts  of  the  bank,  but 
Re?tri^tfwis  those  who  were  absent  or  had  dissented  might 

exonerate  themselves  by  giving  notice  forth- 
with to  the  governor  of  the  state ;  (4)  statements  of  the 
bank's  affairs  were  to  be  given  to  the  governor  and  council 
every  six  months,  but  no  form  of  statement  was  prescribed ; 
(5)  the  bank  was  prohibited  from  dealing  in  merchandise  or 
in  the  shares  of  any  bank. 

The  third  in  point  of  time  was  the  Bank  of  New  York, 
founded  —  or,    at    all    events,    proposed  —  by    Alexander 

Hamilton  in  1784,  as  an  alternative  to  a 
York/*^'"^         land  bank  favored  by  Chancellor  Livingston. 

Under  the  Livingston  plan  one-third  of  the 
bank's  capital  was  to  be  paid  in  cash  and  the  remaining 
two-thirds  was  to  consist  of  landed  security  in  New  York 
and  New  Jersey.  In  March,  1784,  Hamilton  wrote  a  letter 
to  J.  B.  Church,  counseling  him  against  this  project  and 
proposing  a  "  money  bank  "  in  place  of  it.  He  dissuaded 
several  city  merchants  from  taking  an  interest  in  the  land 
bank,  and  they  then  asked  him  to  draw  up  articles  for  a 
money  bank,  which  he  did.  This  was  the  Bank  of  New 
York.  It  began  business  without  a  charter  on  June  9  of 
the  same  year.  As  its  application  to  the  legislature  for  a 
charter  was  refused,  it  began  business  without  one ;  but  the 
only  penalty  for  doing  so  was  the  condition  that  the  liability 
of  the  shareholders  for  the  debts  of  the  bank  was  unlimited. 
The  bank,  when  organized,  announced  that  the  rate  of 
interest  on  loans  would  be  6  per  cent,  that  loans  should 
run  for  thirty  days  only,  that  no  note  would  be  discounted 
to  pay  a  former  one,  that  payments  to  the  bank  must  be 
made  in  its  own  notes  or  in  specie,  and  that  overdrafts 
would  not  be  allowed.     Gold  coins,  which  at  that  time  were 


EARLY   AMERICAN   BANKS  249 

more  or  less  clipped  or  abraded,  were  to  be  received  by 
weight  only.  These  regulations,  especially  the  one  requiring 
punctual  payment  of  debts,  made  the  bank  very  prosperous 
but  very  unpopular. 

The  directors  were  charged  with  working  in  the  interest  of 
British  capitalists  and  traders  and  with  refusing  discounts  a  few 
days  before  the  sailing  of  the  European  packet,  that  they,  person- 
ally, might  profit  by  the  distress  thus  occasioned, 
nn  0  ular  '^^^  bank,  it  was  contended,  had  destroyed  private 

credit,  as  well  as  that  confidence,  forbearance  and 
compassion  formerly  shown  by  creditors  to  their  debtors.  Such 
was  the  result  of  enforcing  the  payment  of  a  note  at  maturity 
when  lodged  in  the  bank.  And  among  the  terrible  consequences 
to  follow,  it  was  predicted  that  "  if  their  number  is  not  restricted, 
should  banks  be  permitted  in  America,  after  the  profits  they  yield 
are  known,  we  may  not  alone  have  one  in  every  state  but  also  in 
every  county  of  the  different  states."  ^ 

In  1786  the  state  made  an  emission  of  bills  of  credit, 
with  the  result  that  the  bank  divided  itself  into  two  parts,  a 
specie  bank  and  a  paper  bank,  keeping  the  accounts  of  the 
former  in  dollars  and  of  the  latter  in  pounds,  making  dis- 
counts in  paper  on  Tuesdays  and  in  specie  on  Thursdays, 
and  issuing  some  of  its  circulating  notes  redeemable  in 
paper  of  the  state  and  others  redeemable  in  specie. 

An  application  was  made  for  a  charter  in  1785  and  another 

in  1789.    Both  were  refused.     A  charter  was  finally  granted 

to  the  bank  in   1791.     It  provided   (i)   that 

5!®^fl  ^.  the  debts  of  the  bank,  "over  and  above  the 

Restrictions.  -  ' 

monies  then  actually  deposited  in  the  bank," 
should  not  exceed  three  times  the  amount  of  the  capital 
actually  paid  in  ;  (2)  that  it  should  not  hold  real  estate, 
except  such  as  might  be  requisite  for  the  accommodation  of 
its  own  business  or  such  as  it  should  have  taken  as  security 
1  History  of  the  Bank  of  New  York,  1^84-1884,  by  Henry  W.  Domett. 


250  BANKING 

for  debts  previously  contracted ;  (3)  that  it  should  not 
deal,  or  trade,  in  any  kind  of  commodities,  or  in  the  stocks 
of  the  United  States,  or  of  any  state,  though  it  might,  when 
necessary,  sell  any  such  stocks  pledged  to  it  by  way  of 
security. 

In  the  first  list  of  shareholders  of  this  bank  are  the  names 
of  Alexander  Hamilton,  Aaron  Burr,  and  Rufus  King.  One 
of  the  depositors  was  Talleyrand,  some  of  whose  checks  are 
still  preserved. 

The  earliest  regulations  of  banking  enacted  by  public 
authority  in  the  United  States  were  those  enumerated 
above.  The  first  regulation  of  Massachusetts  had  refer- 
ence to  the  denominations  of  bank  notes.  The  question 
whether  a  bank  should  be  allowed  to  issue 
Sman Notes  notes  smaller  than  $5.00  or  $10  was  a  matter 

of  controversy  in  most  of  the  states  during 
the  first  half  of  the  nineteenth  century.  Legislation  on  the 
subject  was  not  uniform.  It  was  contended,  on  the  one 
hand,  that  it  was  desirable  to  have  a  large  amount  of  specie 
in  circulation,  in  order  to  give  stability  to  the  currency,  and 
that  the  way  to  secure  this  was  to  banish  small  notes.  It 
was  also  argued,  on  the  other  side,  that  the  circulation  of 
specie,  beyond  the  amount  required  for  small  change, 
was  an  inconvenience  and  involved  an  appreciable  loss 
by  abrasion.  Experience  in  the  United  States  has  now 
decided  in  favor  of  paper  currency  of  denominations  as 
small  as  $1.00. 

The  restriction  of  notes  and  loans  to   twice  the  capital 

stock  actually  paid  in  was  intended  to  guard  against  undue 

expansion  of  both  debts  and  credits.     In  the 

Restriction  j^ter  legislation  of  Massachusetts,  as  will  be 

of  Debts  and  f  .     .  ,  ' 

Credits.  seen,  the  restriction   was   changed  so   as  to 

provide  that  neither  the  credits  nor  the  debts 

of  a  bank  (except  for  deposits)  should  exceed  twice  the 


EARLY   AMERICAN    BANKS.  25 1 

capital,  the  deposits  not  being  reckoned  as  debts  for  this 
purpose.  (This  restriction,  as  regards  loans,  has  been 
superseded  in  the  national  banking  law  by  a  require- 
ment that  a  bank  shall  not  make  new  loans  when  its 
cash  reserve  is  below  a  certain  percentage  of  its  deposits.) 
In  case  of  violation  of  the  law,  the  directors  were  per- 
sonally liable  for  the  debts  of  the  bank  unless  they  took 
immediate  steps  to  make  their  dissent  known  to  the  public 
authorities. 

The  reasons  for  requiring  periodical  bank  statements 
have  been  considered  in  Chapter  II,  but  the  Massachusetts 
requirement  was  defective,  since  it  gave  opportunity  to  the 

bank's  officers  to  make  special  preparations 
bSonr°^^'  therefor.     The  prohibition  against  trading  in 

merchandise  was  proper,  since  such  trading 
would  have  made  the  banker  a  rival  in  business  of  the 
merchant  and  to  that  extent  would  have  incapacitated  him 
for  discounting  the  merchant's  paper.  The  two  vocations 
should  be  cooperative,  not  competitive.  It  was  inexpedient 
also  for  a  bank  to  buy  its  own  shares,  since  by  so  doing  it 
impaired  its  capital.  If  Bank  A,  for  example,  with  a  paid 
capital  of  $100,000,  buys  in  all  its  shares,  it  stands  just 
where  it  was  before  any  was  paid.  If  Banks  A  and  B  buy 
each  other's  shares,  the  result  is  the  same  as  though  each 
one  had  bought  its  own  shares.  The  community,  in  that 
case,  has  no  more  banking  capital  than  if  neither  of  them 
had  ever  existed. 

As  the  debts  of  a  bank  consist,  for  the  most  part,  of  its 
deposits  and  its  circulating  notes,  the  first  legal  restriction 

on  the  powers  of  the  Bank  of  New  York  was 
RestrSions  practically  that    its    note    issues    should    not 

exceed  three  times  the  amount  of  its  paid-up 
capital.  If  there  was  to  be  any  legal  restriction  on  note 
issues,  this  provision  was  sufficiently  Hberal.     At  the  time 


252  BANKING 

when  the  charter  was  granted,  and  while  there  was  no 
restriction  whatever  on  its  note  issues,  its  paid-up  capital 
was  $318,250  specie,  and  its  outstanding  notes  of  the  two 
kinds  only  $360,000  specie  value.  The  clause  in  reference 
to  the  holding  of  real  estate  was  a  sound  restriction.  Since 
a  bank's  liabilities  are  payable  on  demand,  its  investments 
should  be  in  quick  assets.  Real  estate  is  not  included  in 
that  category.  The  prohibition  against  trading  in  commodi- 
ties is  a  repetition  of  the  law  of  Massachusetts,  and  the 
reasons  for  it  are  the  same.  It  does  not,  however,  follow 
that  the  banker  should  not  buy  or  sell  stocks  of  the  state 
or  of  the  United  States.  Those  are  often  highly  desirable 
forms  of  investment  for  some  part  of  the  funds  of  banks,  by 
reason  of  the  facility  with  which  they  can  be  turned  into 
cash  in  emergencies. 

RECAPITULATION 

When  the  'Federal  Constitution  was  formed,  there  were 
three  banks  in  the  United  States,  which  still  exist, — the 
Bank  of  North  America  at  Philadelphia,  the  Bank  of  Massa- 
chusetts, and  the  Bank  of  New  York.  All  were  issuing  cir- 
culating notes,  and  continued  to  do  so,  without  dispute  or 
question,  after  the  Constitution  was  adopted.  It  is  plain, 
therefore,  that  the  clause  of  the  Constitution  which  prohibits 
the  states  from  emitting  bills  of  credit  did  not  prohibit,  or 
have  any  reference  to,  bank  notes. 

One  of  these  banks  existed  several  years  before  it  received 
a  charter  from  the  legislature,  and  it  exercised,  without  dis- 
pute or  question,  the  functions  of  issue  and  deposit.  It  is 
evident,  therefore,  that  the  banking  business  was  free  in  the 
United  States  until  it  was  restrained  by  statute.  Restric- 
tions were  enacted  by  the  state  legislatures  from  time  to 
time,  which  reflect  the  state  of  public  opinion  at  the  several 


EARLY   AMERICAN   BANKS  253 

times  and  places.  The  earliest  regulations  of  law  related  to 
the  denominations  of  bank  notes,  to  the  proportions  which 
should  exist  between  the  capital  on  the  one  hand  and  the 
debts  and  credits  of  banks  on  the  other,  to  the  holding  of  real 
estate,  and  to  the  power  of  trading  in  goods  and  securities. 

Authorities 

Sumner's  Fitiaiicier  and  Fina7ices  of  the  Amej'ican  Revolution. 
Lewis'  History  of  the  Ba7ik  of  North  America. 
Domett's  History  of  the  Batik  of  New  York,  1 784-1884. 


CHAPTER   VI 

FIRST  BANK  OF  THE  UNITED  STATES 

The  next  event  of  importance  in  the  history  of  banking 
in  this  country  was  the  organization  of  the  Bank  of  the 
United  States  in  1791.     This  institution  was  established  on 
lines  laid  down  by  Alexander  Hamilton,  the 
Re^rt°°  ^  ^^^^  Secretary  of  the  Treasury,  in  a  report  dated 

December  14,  1790,  made  in  obedience  to  an 
order  of  the  House  of  Representatives.  This  report  embraced 
a  statement  of  the  principles  which  should,  in  his  opinion, 
govern  such  an  institution  and  of  the  reasons  why  it  might 
be  useful  to  the  government  in  emergencies  and  to  the  busi- 
ness community  at  all  times.  Hamilton  took  ground  against 
paper  money  issued  by  the  government,  either  directly  or 
through  a  bank  owned  by  itself,  but  he  saw  no  reason  why  the 
government  should  not  be  a  partner  in  the  bank,  provided 
the  management  was  in  the  hands  of  the  private  owners. 

The  bank  act  passed  by  Congress  followed,  for  the  most 
part,  the  plan  which  he  proposed.  The  capital  was  to 
be  $10,000,000,  divided  into  25,000  shares  of  $400  each. 
Eight  millions  of  the  capital  stock  was  open  to  subscription 
by  the  public,  one-fourth  to  be  paid  in  specie  and  three- 
fourths  in  government  obligations  bearing 
CapiS"^'^  6    per    cent    interest,    the    subscriptions    to 

be  paid  within  two  years.  The  remaining 
$2,000,000  of  the  capital  might  be  subscribed  by  the  United 
States,  payable  in  ten  equal  annual  instalments  with  interest 
at  6  per  cent,  and  was  so  subscribed.     Each  shareholder 

254 


FIRST   BANK    OF   THE    UNITED    STATES  255 

was  entitled  to  cast  one  vote  for  one  share,  one  vote  for  the 
next  two  shares,  and  so  on,  no  shareholder  being  entitled  to 
cast  more  than  thirty  votes.  Foreign  shareholders  were  not 
allowed  to  vote  by  proxy,  and  therefore  practically  could 
not  vote  at  all.  Not  more  than  three-fourths  of  the  directors 
were  eligible  for  the  next  succeeding  year.  The  bank  could 
not  hold  real  estate  except  for  the  immediate  accommoda- 
tion of  its  business,  but  it  was  not  forbidden  to  lend  on 
mortgage  security.     The  bank  could  not  become  indebted 

for  a  greater  amount  than  its  capital  stock, 
cwter^''  °*'^'  over  and  above  the  amount  of  its  deposits,— 

that  is,  the  deposits  were  not  to  be  counted 
as  liabilities,  in  estimating  its  right  to  contract  debts.  In 
case  of  excess,  the  directors  were  to  be  personally  liable  to 
creditors  of  the  bank,  but  directors  absent  or  dissenting 
might  exonerate  themselves  by  notifying  the  President  of 
the  United  States  and  the  stockholders  at  a  meeting  which 
they  should  have  the  power  to  call  for  that  purpose.  There 
was  no  other  limit  on  the  note  issues  of  the  bank  than  this. 
It  meant  substantially  that  the  circulating  notes  might  be 
equal  in  amount  to  the  capital  stock.  The  head  of  the 
Treasury  should  have  the  right  of  inspecting  all  of  the 
affairs  of  the  bank  except  the  accounts  of  private  individ- 
uals and  could  call  for  reports  as  often  as  once  a  week  if 
he  chose  to  do  so.  The  notes  of  the  bank  should  be 
receivable  for  all  public  dues  as  long  as  said  notes  were 
payable  in  gold  and  silver  coin.  The  Treasury  was  not 
required  to  deposit  the  public  money  in  the  bank.  The 
bank  might  have  branches  wheresoever  the  directors  should 
see  fit.  It  might  sell  any  part  of  the  public  debt  of  which 
its  stock  was  composed,  but  could  not  purchase  any  public 
debt  whatsoever,  nor  trade  in  goods  except  such  as  might 
have  been  pledged  for  money  loaned  and  not  repaid. 
The  rate  of  interest  on  loans  could  not  exceed  6  per  cent. 


256  BANKING 

The  government  pledged  itself  to  grant  no  other  charter  for 
a  bank  during  the  continuance  of  this  one,  which  was  lim- 
ited to  twenty  years.  The  bill  passed  the  Senate  Decem- 
ber 23,  1790,  without  a  division.  It  passed  the  House 
February  8,  1791;  yeas  39,  nays  20.  All  the  affirmative 
votes,  except  three,  were  from  states  north  of  the  Potomac, 
mostly  of  Federalists  ;  all  the  negative,  except  one,  were  from 
states  south  of  it,  mostly  of  anti-Federalists,  or  Republicans, 
as  the  followers  of  Jefferson  were  called. 

President  Washington  called  for  the  written  opinion   of 
the  Attorney-General,  Edmund  Randolph,  on  the  constitu- 
tionality of  the  bill.     It  was  given  adversely 

Constitutionality  ^^  ^^^  measure.  He  then  asked  for  that  of 
of  the  Bill. 

the  Secretary  of  State,  Mr.  Jefferson.     This 

was  also  adverse.  Jefferson  held  that  there  was  no  warrant 
in  the  Constitution  for  the  incorporation  of  a  bank  by  Con- 
gress, and  that  it  could  not  be  considered  "  necessary  "  for 
carrying  into  effect  any  other  power  expressly  conferred 
upon  Congress.  He  admitted,  however,  that  if,  in  the  Presi- 
dent's mind,  the  pros  and  the  cons  were  pretty  evenly  bal- 
anced, the  doubt  ought  to  be  resolved  in  favor  of  the  bill,  as 
a  matter  of  respect  and  deference  to  the  legislative  branch 
of  the  government.  The  opinions  of  Randolph  and  Jeffer- 
son were  then  sent  to  Hamilton  for  such  answer  as  he  might 
be  able  to  make,  and  he  replied  at  considerable  length  and 
with  great  force.  He  held  that  the  word  "  necessary,"  as 
used  in  the  Constitution,  did  not  mean  absolutely  necessary, 
but  fitting  and  appropriate.  He  said  that  no  power  had  been 
conferred  upon  Congress  to  establish  lighthouses  and-  buoys. 
The  power  to  erect  and  establish  these  things  was  inferred 
from  the  power  to  regulate  commerce  and  nobody  questioned 
it,  yet  commerce  could  be  regulated  without  lighthouses  and 
buoys.  Hamilton's  arguments  prevailed,  and  Washington 
signed  the  bill. 


FIRST   BANK   OF   THE   UNITED   STATES  257 

Of  regulations  in  the  charter  of  this  bank  additional  to, 
or  different  from,  those  of  the  earlier  ones,  mentioned  in 
the   preceding   chapter,   the  most   important 

Regulations. 


Reasons  for  ^^^  ^^^^^  relating  to  the  composition  of  the 


bank's  capital  and  to  participation  of  the 
government  as  a  shareholder.  In  explanation  and  defense 
of  the  provision  which  allowed  three-fourths  of  the  capital  to 
be  paid  in  the  6  per  cent  obligations  of  the  government, 
Hamilton  said  in  his  report : 

The  chief  object  of  this  is  to  enable  the  creation  of  a  capital 
sufficiently  large  to  be  the  basis  of  an  extensive  circulation  and 
an  adequate  security  for  it.  .  .  .  To  collect  such  a  sum  in  this 
country  in  gold  and  silver  into  one  depository  may,  without  hesi- 
tation, be  pronounced  impracticable.  Hence  the  necessity  of  an 
auxiliary,  which  the  public  debt  at  once  presents.  This  part  of 
the  fund  will  be  always  ready  to  come  in  aid  of  the  specie ;  it  will 
more  and  more  command  a  ready  sale  and  can  therefore  be  expe- 
ditiously turned  into  coin  if  an  exigency  of  the  bank  should  at 
any  time  require  it. 

No  exception  need  be  taken  to  this  argument,  considering 
the  time  and  circumstances  of  the  case.  Ordinarily  it  would 
not  be  considered  good  banking  practice  to 
L^ashlrerider.  ^^^^P^  anything  but  money  as  a  part  of  the 
capital,  even  though  some  portion  of  it  were 
subsequently  invested  in  government  bonds.  Such  invest- 
ment should  be  left  to  the  discretion  of  the  directors  after 
the  organization  is  effected.  Although,  as  Hamilton  said, 
the  bonds  were  intended  to  be  the  basis  of  circulation  and 
an  adequate  security  for  it,  they  remained  under  the  control 
of  the  bank  and  might  be  converted  into  money  at  any  time. 

The  government's  participation  as  a  shareholder  was  not 
justified  in  this  instance  by  necessity,  as  it  had  been,  ten 
years  earlier,  in  the  case  of  the  Bank  of  North  America. 
Private  persons  were  now  eager  to  supply  all  the  capital 


258  BANKING 

required.  If  pecuniary  gain  were  a  sufficient  reason  for  the 
government's  participation,  it  could  have  been  obtained 
more  easily,  and  without  risk,  by  a  tax.  Even  if  we  conceive 
it  expedient  for  the  government  to  have  been  a  shareholder 
at  all,  the  clause  which  allowed  it  a  long  credit  in  paying  for 
its  stock  was  indefensible.  It  was  a  speculation  on  the  part 
of  the  government,  and  a  successful  one  as  it  turned  out, 
but  it  set  the  example  of  paying  for  shares  with  "  stock 
notes,"  which  was  the  poison  of  banking  in  the  United 
States  for  the  next  fifty  years. 

"The  provisions  giving  to  the  small  shareholders  greater 
voting  power  in  proportion  to  their  holdings  than  the  large 
ones  and  requiring  one-fourth  of  the  directors  to  retire  at  the 
end  of  each  year  were  intended  to  prevent  the  bank  from 
passing  into  the  control  of  a  clique.  These  methods  of  dis- 
tributing power  in  the  management  of  banks 
Sharehoiderr  °  were  very  generally  adopted  by  the  state  legis- 
latures in  the  first  half  of  the  nineteenth  cen- 
tury, but  their  importance  was  evidently  overestimated,  since 
they  have  been  wholly  abandoned  without  any  harmful  con- 
sequences. The  provision  which  prohibited  the  foreign 
shareholders  from  voting  by  proxy  was  intended  to  exclude 
foreign  influence  from  the  management.  As  the  owners 
abroad  would  not  be  likely  to  cross  the  ocean  in  order  to 
vote,  they  would  not  be  able  to  vote  at  all.  Foreign  influ- 
ence was  very  much  of  a  bugbear  at  that  time,  but  it  does 
not  appear  that  the  shareholders  in  Europe  ever  betrayed 
any  desire  to  vote  or  to  exercise  any  influence  whatever  on 
the  management. 

The  provision  that  the  note  issues  of  the  bank  should 
not  exceed  the  amount  of  the  capital  stock  seems  to  have 
been  unnecessary,  since  no  report  of  note  issues  exceeding 
$5,157,378,  or  a  little  more  than  one-half  of  the  capital,  has 
reached  us.     Very  few  reports  of  the  condition  of  the  bank, 


FIRST   BANK   OF   THE    UNITED    STATES  259 

however,  were    published.     It   is    not   known  whether  the 
Secretary  of  the  Treasury  ever  exercised  his  right  of  inspect- 
ing, or  how  often  he  called  for  reports  of  its 
other  Provisions.  ...  _     ,  ,  , 

condition.  Only  two  such  reports  were  sub- 
mitted to  Congress  by  Gallatin,  both  being  in  connection 
with  the  proposal  to  renew  the  charter. 

The  Treasury  was  not  required  to  keep  the  public  money 
in  the  bank,  but  it  kept  about  two-thirds  of  it  there,  and  the 
balance  in  state  banks  selected  by  the  President.  The  parent 
bank  was  at  Philadelphia.  It  had  branches  at  Boston,  New 
York,  Baltimore,  Norfolk,  Charleston,  Savannah,  Washington, 
and  New  Orleans.  It  transferred  the  public  funds  from 
place  to  place  at  its  own  expense  and  paid  the  money  on  the 
order  of  the  Treasurer  of  the  United  States  wherever  wanted. 

The  prohibition  against  the  purchase  of  any  public  debt 
was  adopted  because  it  was  believed  that  the  bank  would 
be  able,  with  its  large  capital,  to  control  the  market  and 
put  the  price  of  government  securities  up  or  down  at  its 
own  pleasure. 

The  entire  capital  of  the  bank  was  subscribed  for  within 
two  hours  after  the  books  were  opened.  It  was  a  great 
financial  success  from  the  start.  It  began  operations  in 
December,  1791,  and  paid  a  dividend  of  4  per  cent  in  July, 
1792.  In  1809  Mr.  Gallatin  reported  that  the 
succls!!°^''"^^  government  had  made  a  profit  of  $671,860  on 
the  sale  of  its  shares  *  besides  receiving  divi- 
dends at  the  average  rate  of  8|  per  cent  per  annum.  Of 
the  25,000  shares,  18,000  were  held  abroad  and  7000  in 
the  United  States.  The  outstanding  circulation  at  that 
time  was  $4,500,000;  specie  on  hand,  $5,000,000  ;  deposits, 
$8,500,000;  loans  and  discounts,  $15,000,000,  consisting 
mostly  of  sixty-day  paper. 

The  government,  at  that  time,  did  not  require  the  pay- 
ment of  customs  duties  on  the  delivery  of  the  goods  imported, 


26o  BANKING 

but  accepted  the  bonds  of  the  importers  payable  at  a  future 
date.     The  bank  collected  the  payment  of  the  bonds,  and  it 

refused  to  receive  the  notes  of  non-specie-pay- 
fhSrency!^       ing  banks.     It  thus  established  a  standard  of 

commercial  honor  and  enforced  it  upon  the 
banks  chartered  by  state  authority.  In  this  way  it  became 
a  regulator  of  the  currency,  but  it  incurred  the  enmity  of 
the  slovenly  and  fraudulent  bankers  of  the  period  and  of  the 
second-rate  traders  and  speculators  by  the  rigidity  of  its 
rules. 

In  1809  Secretary  Gallatin  recommended  a  renewal  of  the 
bank's  charter  with  an  increase  of  its  capital  to  $30,000,000. 
War  with  England  was  impending,  and  Mr.  Gallatin  proposed 
that  the  bank  should  be  bound  in  the  new  charter  to  lend 
three-fifths  of  its  capital  to  the  government  if  required  to  do 
so,  and  that  it  should  pay  interest  on  all  government  deposits 
in  excess  of  $3,000,000.  A  contest  of  extreme  bitterness 
ensued.     The  bank  had  been  established  in  the  first  instance 

by   the    Federalists,    who    had    lost    political 

still  strong  in  wealth  and  respectability.  They 
had  established  the  bank  against  Mr.  Jefferson's  ideas ;  and 
he,  although  yielding  to  Mr.  Gallatin  on  practical  measures 
and  signing  various  bills  supplementary  to  the  original 
charter,  had  remained,  both  in  his  administration  and  in 
his  retirement,  a  consistent  foe  to  it.  President  Madison, 
who,  as  a  member  of  the  House,  had  opposed  the  original 
charter  on  the  ground  of  unconstitutionality,  was  now  dis- 
posed to  look  at  the  question  as  res  adjudicata.  He  neither 
favored  nor  opposed  a  new  charter.  There  was,  however, 
a  faction  opposed  to  Mr.  Gallatin  which  had  its  principal 
seat  in  Pennsylvania,  its  leaders  being  William  Duane 
and  Michael  Leib.  These  men  wanted  to  have  certain 
changes  made  in  the  Federal  offices  in  Philadelphia,  which 


FIRST  BANK  OF  THE   UNITED   STATES  26 1 

Mr.   Gallatin  refused  on  public  grounds.    The  spoilsmen 
were  determined  to  force  Gallatin  out  of  office  if  they  could, 

and  to  this  end  they  opposed  everything  that 
syste^'^^  he  favored.     A  clique  in  Maryland  headed  by 

the  Secretary  of  State,  Robert  Smith,  and  his 
brother.  Senator  Smith,  was  equally  bitter  against  Gallatin 
and  consequently  against  the  bank. 

Notwithstanding  this  factional  opposition  the  usefulness 
of  the  bank  was  so  manifest  that  there  would  have  been  a 
strong  majority  for  the  new  charter,  if  the  question  had  come 
to  a  vote  when  the  subject  was  first  taken  up.  On  the 
2d  of  April,  18 10,  the  House  Committee,  to  whom  the  peti- 
tion of  the  bank  for  a  recharter  had  been  referred,  reported 
favorably.  On  the  21st  of  the  same  month  a  motion  to  post- 
pone indefinitely  was  defeated  ;  yeas  46,  nays  67.  Then  the 
matter  was  laid  over  informally  till  January  4,  1811.^  The 
state  banks  took  advantage  of  the  delay  to  bring  pressure 
on  their  local  representatives  against  a  recharter.  They 
wanted  to  secure  the  government's  deposits  for  themselves 
and  to  get  rid  of  the  competition  of  the  great  bank  in  other 

ways.     Some  persons  who  had  more  political 

Opposition  to  the    jj^fl^jg^ce  than  credit  were  incensed  because 
New  Charter. 

their  paper  had  been  refused  for  discount  at 

the  bank.    The  Republicans  seized  this  opportunity  to  be 

revenged  on  the  Federalists.     They  denounced  the  bank  as 

an  aristocratic,  and  especially  as  a  foreign,  institution.    One 

of  the  most  vehement  speakers  against  the  bank,  on  account 

of  the  foreign  holdings  of  its  shares,  was  Henry  Clay,  who 

said  in  a  speech  in  the  Senace  on  February  15,  181 1  : 

Seven -tenths  of  its  capital  is  in  the  hands  of  foreigners,  and 
these  foreigners  chiefly  English  subjects.  We  are  possibly  on  the 
eve  of  a  rupture  with  that  nation.  Should  such  an  event  occur, 
do  you  apprehend  that  the  English  premier  would  experience  any 
difficulty  in  obtaining  the  entire  control  of  this  institution? 


262  BANKING 

Mr.  Gallatin  had  exposed  this  fallacy  two  years  earlier  by 
showing  that  the  foreign  shareholders  had  no  vote  in  the 
management  and  that,  if  the  charter  were  not  renewed,  the 

portion  of  the  bank's  capital  held  by  foreign- 
fnScf^'''^''     ers    (mostly  Englishmen),  and  amounling  to 

$7,200,000,  must  be  remitted  to  the  owners  at 
once.  This  demonstration  of  the  impolicy  of  liberating  and 
sending  abroad  more  than  $7,000,000  of  specie  at  a  time 
when  we  were  likely  to  need  every  dollar  of  coin  that  the 
country  contained  had  not  the  smallest  effect  on  the  anti- 
Federalist  faction,  except  to  increase  their  fury.  Mr.  Desha, 
a  representative  of  Kentucky  (February  12,  181 1),  con- 
sidered this  foreign  capital  one  of  the  engines  set  to  work  to 
overturn  civil  liberty.  He  had  no  doubt  that  George  III 
was  a  principal  stockholder  and  that  the  latter  would  author- 
ize hjs  agent  in  this  country  to  bid  millions  for  a  renewal 
of  the  charter.  The  new  charter  was  not  wanted  except 
by  a  few  speculating  merchants  who  had  become  involved 
in  debt  and  had  borrowed  money  from  "  this  foreign  bank." 
The  only  way  to  save  liberty,  in  his  opinion,  was  "to 
assist  in  strangling  this  infant  Hercules  in  the  cradle." 
He  concluded  by  suggesting  that,  unless  the  British  gov- 
ernment should  rescind  its  clandestine  measures  affecting 
our  rights,  rather  than  renew  the  charter  of  the  bank  we 
ought  to  confiscate  the  British  capital  in  it  and  use  it  in 
conquering  Canada. 

The  government  had  sold  its  own  property  in  the  bank 
to  foreigners  at  a  large  premium.     The  last  sale  of   2220 

shares  had  been  made  in  1802  at  145  to 
The  Government's  gij-  Francis  Baring,  who  had  resold  them 
Bank.  ^^  England  at   150.     The  purchasers  bought 

them  as  shares  in  an  active  concern.  Of 
course,  they  were  charged  with  knowledge  that  the  charter 
would  expire  in   18 11  and  that  it  might  not  be  renewed; 


FIRST   BANK   OF   THE    UNITED    STATES  263 

but  it  was  not  creditable  in  congressmen  to  declaim  against 
foreign  holdings  as  a  reason  for  refusing  a  charter,  when 
the  government  had  pocketed  a  bonus  of  nearly  $700,000 
from  these  same  foreigners  in  the  expectation  that  it  would 
be  renewed. 

The  bank  was  not  without  friends  among  the  Republi- 
cans. The  best  speech  made  for  the  new  charter  was  that 
of  Senator  Crawford  of  Georgia,  —  a  masterly  effort  from 

nearly  all  points  of  view.  Senator  Lloyd  of 
Detete"*^  Massachusetts  made  a  strong  speech  on  the 

same  side,  supplying  some  interesting  items  of 
banking  intelligence.  As  showing  the  great  convenience  to 
the  government  of  an  apparatus  by  which  payments  could  be 
made  at  specie  value  everywhere,  without  cost  for  the  trans- 
mission of  funds,  he  said  that  Penobscot  bank  notes  would 
not  pass  in  Boston  at  all  times,  that  Boston  bank  notes 
passed  with  difficulty  in  New  York  and  Philadelphia,  while 
those  of  New  York  were  not  readily  current  in  Washington. 
Mr.  Clay  held  that  Congress  had  no  power  to  grant  the 
original  charter  or  to  renew  it.  On  March  2  he  presented  a 
report  denying  a  petition  of  the  bank  for  an  extension  of  its 
charter  sufficiently  long  to  wind  up  its  affairs.  The  report 
says  that,  "  holding  the  opinion  (as  a  majority  of  the  com- 
mittee do)  that  the  Constitution  did  not  authorize  Congress, 
originally,  to  grant  the  charter,  it  follows  as  a  necessary  con- 
sequence of  that  opinion,  that  an  extension  of  it,  even  under 
the  restrictions  contemplated  by  the  stockholders,  is  equally 
repugnant  to  the  Constitution."  Five  years  later  he  was  a 
strong  advocate  of  the  charter  of  the  second  Bank  of  the 
United  States,  saying  that  "  that  which  appeared  to  him  in 
181 1  under  the  state  of  things  then  existing  not  to  be  neces- 
sary to  the  general  government,  seemed  now  to  be  necessary 
under  the  present  state  of  things.  Had  he  then  foreseen 
what    now  exists  and  no   objection   had  lain   against   the 


264  BANKING 

renewal    of   the  charter  other  than  that  derived  from  the 
Constitution,  he  should  have  voted  for  the  renewal."  ^ 

The  vote  was  taken  in  the  House  January  24,  181 1,  on  a 
motion  to  postpone  indefinitely,  which  motion  prevailed  by 
a  majority  of  one,  —  65  to  64.     The  vote  in  the  Senate  on  a 

similar  bill  (February  20)  was  a  tie,  —  17  to 
Charter  refused.  ,        ^  ^        ^      ,.  . 

17,  —  whereupon  George  Chnton,  the  Vice- 
President,  gave  the  casting  vote  against  the  bank.  It  was 
accordingly  put  in  liquidation.  It  paid  the  shareholders 
$434  for  each  share  of  $400,  ?>.,  a  surplus  of  nearly  9  per 
cent.  Thus  the  country  lost  a  most  valuable  financial  insti- 
tution. There  was  straightway  a  mushroom  growth  of  new 
state  banks  to  fill  the  void,  so  that  one  hundred  and  twenty 
were  chartered  and  put  in  operation  within  three  years. 
The  government  went  to  war  in  1812,  leaning  upon  the 
state  banks  for  financial  support.  Most  of  them  suspended 
payments  in  September,  18 14,  after  which  the  country 
wallowed  in  irredeemable  paper  for  several  years.  If  the 
charter  of  the  great  bank  had  been  renewed  in  181 1, 
specie  payments  would  probably  have  been  maintained 
throughout  that  crisis.  Mr.  Gallatin,  writing  many  years 
later,  said  : 

It  is  our  deliberate  opinion  that  the  suspension  might  have 
been  prevented  at  the  time  when  it  took  place  had  the  former 
Bank  of  the  United  States  been  still  in  existence.  The  exagger- 
ated increase  of  state  banks,  occasioned  by  the  dissolution  of  that 
institution,  would  not  have  occurred.  That  bank  would  as  before 
have  restrained  within  proper  bounds  and  checked 

Mr.  Gallatin's        ^_Yie\r  issues,  and  through  the  means  of  its  offices 
Opinion.  .  . 

(branches)  it  would   have  been  in  possession  of 

the   earliest   symptoms    of   the    approaching   danger.     It   would 

have  put  the   Treasury  Department  on  its   guard ;  both   acting 

in  concert  would  certainly  have  been  able  at  least  to  retard  the 

1  Annals  of  Congress,  181J-1816,  p.  1194. 


FIRST   BANK   OF   THE    UNITED    STATES  265 

event,  and  as  the  treaty  of  peace  was  ratified  within  less  than  six 
months  after  the  suspension  took  place,  that  catastrophe  would 
have  been  altogether  avoided. 

By  restraining  the  issues  of  the  state  banks  within  proper 
bounds  Mr.  Gallatin  meant  that  the  bank  would  have  pre- 
sented their  notes  promptly  for  redemption,  thus  keeping 
their  issues  within  the  limit  of  safety. 

RECAPITULATION 

The  first  Bank  of  the  United  States  was  devised  by  Alex- 
ander Hamilton.  It  was  one  of  a  series  of  financial  meas- 
ures through  which  that  statesman  sought  to  bind  the  people 
of  the  newly  formed  Union  together,  by  giving  them  certain 
pecuniary  interests  in  common.  The  bank's  charter  was 
supported  by  the  Federalist  party  and  opposed  by  the  anti- 
Federalists,  or  Republicans.  It  became  a  law  in  February, 
1 79 1,  and  the  bank  was  put  in  operation  in  the  following 
December.  The  capital  was  $10,000,000,  of  which  $2,000,000 
was  subscribed  by  the  government.  The  private  subscriptions 
were  payable  within  two  years  in  half-yearly  instalments ; 
that  of  the  government  in  ten  equal  annual  instalments, 
with  interest  at  6  per  cent.  The  charter  of  the  bank  was 
limited  to  twenty  years,  and  the  government  agreed  to 
charter  no  other  bank  during  that  period. 

The  bank  was  a  great  financial  success.  It  paid  dividends 
during  the  term  of  its  existence,  averaging  8|  per  cent  per 
annum,  and  accumulated  a  surplus  equal  to  about  9  per  cent 
of  its  capital,  which  was  eventually  distributed  to  its  share- 
holders. The  parent  bank  was  in  Philadelphia,  with  seven 
branches  in  cities  on  the  Atlantic  seaboard  and  one  in  New 
Orleans.  It  collected  the  bonds  of  importers  for  customs 
duties  and  made  transfers  of  money  at  the  order  of  the 
Treasury,  without  expense  to  the  government.     It  also  made 


266  BANKING 

advances  of  money  to  the  government,  when  required,  at  the 
customary  rate  of  interest.  It  served  the  purpose  of  a  regu- 
lator of  the  currency  by  maintaining  the  highest  standard  of 
commercial  honor,  —  a  standard  to  which  other  banks  were 
obliged  to  conform  under  penalty  of  being  discredited  in  the 
eyes  of  the  business  community. 

When  its  charter  was  about  to  expire  the  bank  applied  to 
Congress  for  a  renewal  of  the  same.  The  Federalist  party 
was  now  in  the  minority,  and  its  opponents  made  the  grant- 
ing of  the  proposed  new  charter  a  political  issue.  The  state 
banks  joined  the  opposition  because  they  wished  to  get  rid 
of  the  competition  of  the  great  bank  and  its  branches.  In 
the  last  year  of  its  existence  the  bank  was  made  a  football 
of  politics.  Its  usefulness  from  a  financial  point  of  view 
received  very  Uttle  attention  in  the  debate  on  the  recharter. 
The  final  decision  was  adverse  to  it,  by  a  majority  of  one 
vote  in  the  House  and  a  tie  in  the  Senate. 

Authorities 

Clarke  and  Hall's  Legislative  a7id  Documentary  History  of  the 
Bank  of  the  United  States. 

Hamilton's  Writings^  edited  by  H.  C.  Lodge. 

Henry  Adams'  Life  of  Albert  Gallatin. 

Gallatin's  Writings^  edited  by  Henry  Adams. 

Von  Hoist's  Constitutional  History  of  the  United  States. 

Sumner's  History  of  Banking  in  the  United  States. 


CHAPTER   VII 

SECOND   BANK   OF   THE  UNITED    STATES 

The  second  war  with  Great  Britain  began  in  1812.     Specie 

payments  were  suspended  in  September,  18 14,  by  nearly  all 

the  banks  south  and  west  of  New  England. 

Financial  Dis-       Their  notes  fell  to  a  discount  ranging  from 

tress  in  1814.  _,,  ,      , 

10    to    30    per   cent.      Ihe    government    had 

defaulted  on  the  interest  of  the  public  debt.     Its  money  was 

mainly  in  the  suspended  banks.     The  financial  condition  of 

the  country  was  desperate.-^     Naturally  the  statesmen  of  the 

day  bethought  themselves  of  the  Bank  of  the  United  States. 

On  the  17th  of  October  the  Secretary  of  the  Treasury,  Mr. 

Dallas,  recommended  that  a  national  bank 
prfp^oseT^^^""^    be  established  with  a  capital  of  $50,000,000, 

of  which  one-tenth  should  be  specie  and  the 
remainder  government  securities  of  one  kind  and  another. 
It  was  to  begin  under  a  suspension  of  specie  payments.  As 
Daniel  Webster  said  in  the  debate :  "  It  was  to  commence 
its  existence  in  dishonor;  it  was  to  draw  its  first  breath  in 
disgrace."  Webster's  speech  of  January  2,  181 5,  was  fatal  to 
this  bill,  for  it  was  rejected  by  a  tie  vote.  A  reconsideration 
was  moved  and  carried,  and  the  bill  was  amended  by  striking 

1  "  The  government  might  possess  immense  resources  in  one  State 
and  be  totally  bankrupt  in  another;  it  might  levy  taxes  to  the  amount 
of  the  whole  circulating  medium  yet  have  only  its  own  notes  available 
for  payment  of  debt ;  it  might  borrow  hundreds  of  millions  and  be  none 
the  better  for  the  loan." — Henry  Adams'  History  of  th^  United  States^ 
VIII,  215. 

267 


268  BANKING 

out  the  clause  requiring  a  specific  loan  to  the  government 
and  the  one  authorizing  the  suspension  of  specie  payments. 
In  this  shape  it  was  passed  by  both  houses ;  but  it  was 
vetoed  by  President  Madison  because  it  did  not  furnish 
sufficient  financial  aid  to  the  government.  The  Senate 
thereupon  took  up  the  original  Dallas  Bill  and  passed  it  on 
February  ii.  But  news  that  a  treaty  of  peace  with  Great 
Britain  had  been  signed  at  Ghent  reached  Washington  on 
the  13th,  and  on  the  17th  the  House,  by  a  vote  of  74  to  73, 
indefinitely  postponed  the  measure. 

As  the  war  had  come  to  an  end,  the  Treasury  was  no 
longer  in  the  desperate  condition  of  the  preceding  year  ;  yet 
Mr.  Madison,  in  his  message  of  December  5,  18 15,  sug- 
gested a  national  bank  as  an  instrumentality  for  bringing 
about  a  resumption  of  specie  payments.  A  bill  for  this 
purpose  was  reported  to  the  House  by  Mr.  Calhoun  on 
January  8,  18 16.  It  passed  both  houses  and  was  signed  by 
President  Madison  on  April  10,  18 16.     The  capital  was  to 

be  $35,000,000,  —  four-fifths  to  be  subscribed 
tM^of  ^816  ^^^'^"    ^y  private  persons  and  one-fifth  by  the  United 

States.  There  were  to  be  twenty-five  direc- 
tors, five  of  whom  should  be  appointed  by  the  President  of 
the  United  States,  by  and  with  the  advice  and  consent  of 
the  Senate,  and  twenty  elected  by  those  stockholders  who 
resided  in  the  United  States.  Foreign  stockholders  could 
not  vote  either  in  person  or  by  proxy.  Both  the  notes  and 
the  deposits  of  the  bank  were  to  be  paid  in  specie.  It  was 
authorized  to  issue  post  notes  not  smaller  than  $100  each, 
payable  not  more  than  sixty  days  after  date.  No  circulating 
notes  were  to  be  issued  of  less  amount  than  $5.00.  All 
notes  were  to  be  signed  by  the  President  and  the  principal 
cashier.  The  notes  should  be  receivable  in  all  payments 
to  the  United  States.  The  bank  was  to  provide  faciHties 
for  transferring  the  public  funds,  without  expense  to  the 


SECOND   BANK   OF   THE    UNITED    STATES        269 

government,  to  any  places  within  the  United  States  where 
payments  were  to  be  made.  Section  16,  regulating  the 
public  deposits,  provided : 

That  the  deposits  of  the  money  of  the  United  States  in  places 
in  which  the  said  bank  or  branches  thereof  may  be  established 
shall  be  made  in  said  bank  or  branches  thereof, 
unless  the  Secretary  of  the  Treasury  shall  at  any 
time  otherwise  order  and  direct ;  in  which  case  the  Secretary  of 
the  Treasury  shall  immediately  lay  before  Congress,  if  in  session, 
and  if  not,  immediately  after  the  commencement  of  the  next 
session,  the  reasons  of  such  order  or  direction. 

The  bank  was  forbidden   "  to  purchase  any  public  debt 
whatsoever."     In  case  the  bank  should  fail  to  pay  any  note, 

obligation,  or  deposit,  in  specie  on  demand,  it 
tion"  ^^^^  ^"       ^^^  ^°  forfeit  1 2  per  cent  per  annum  on  the 

amount  of  the  claim.  The  government's  sub- 
scription of  $7,000,000  could  be  paid  either  in  money  or  in 
its  own  obligations  bearing  5  per  cent  interest.  It  was,  in 
fact,  wholly  paid  by  the  latter,  i.e.^  by  a  stock  note,  and  the 
note  was  not  fully  paid  until  183 1.  The  bank  was  to  pay 
the  United  States  the  sum  of  $1,500,000  as  a  bonus  for 
the  charter,  which  was  to  be  exclusive  and  was  to  continue 
twenty  years.  It  was  forbidden  to  pay  dividends  to  stock- 
holders whose  shares  were  not  fully  paid  for.  The  directors 
were  authorized  to  establish  branch  banks  wheresoever,  in 
the  United  States  or  the  territories  thereof,  they  should 
see  fit. 

Of  the  foregoing  regulations  the  most  important  was  the 
one    which    required   the    deposits    to    be    paid    in    specie. 

Strictly  speaking,  all  obligations  payable  in 
fnspec^e^^^^^^^    dollars  were  payable    in  specie.     There  was 

no  other  legal-tender  money  than  gold  and 
silver  coin.  Yet  the  conception  prevailed  universally  that 
while  a  bank  ought  to  pay  its  notes  in  specie  on  demand,  it 


270  BANKING 

might  properly  pay  its  deposits  in  the  notes  of  other  banks, 
near  or  remote,  provided  the  latter  paid  their  notes  in 
specie.  Consequently,  even  when  the  banks  were  solvent, 
there  were  two  kinds  of  currency  in  circulation  in  every 
city :  (1)  specie  and  the  notes  of  the  local  banks,  which  were 
at  par  ;  (2)  the  notes  of  banks  of  other  cities  and  states, 
which  were  at  a  discount  greater  or  less  according  to  the 
difficulty  of  securing  their  redemption.  This  discount  was 
not  observed  by  the  masses  of  the  people.  To  them  one 
dollar  was  as  good  as  another.  Anything  that  would  pass 
was  gladly  accepted.  But  to  merchants  the  discount  on 
out-of-town  bank  notes  was  a  considerable  expense,  and 
they  sought  to  recoup  themselves  by  charging  enough  for 
their  goods  to  cover  the  loss.  Daniel  Webster  was  opposed 
to  the  pending  bill  in  any  shape,  but  he  struck  a  blow  for 
sound  principles  of  currency  by  securing  the  adoption  of  an 
amendment  providing  that  the  deposits  as  well  as  the  notes 
of  the  Bank  of  the  United  States  should  be  paid  in  specie. 
It  did  not  abolish  everywhere  the  bad  practice  of  having 
two  kinds  of  bank  notes  in  circulation  at  the  same  time  and 
place,  —  one  at  par  and  the  other  at  a  discount,  —  but  it 
abolished  it  in  the  operations  of  the  great  bank,  and  it 
established  a  standard  of  good  banking  which  was  never 
wholly  lost  sight  of,  and  which  reached  its  fulfillment  in  the 
Suffolk  Bank  system  a  few  years  later.  Mr.  Webster  made 
another  contribution  to  sound  finance  during  this  session  of 

Congress  by  securing  the  passage  of  a  bill 
u  lesan  requiring  the  payment  of  all  government  dues 

in  specie,  or  in  Treasury  notes,  or  in  notes  of 
the  Bank  of  the  United  States.  Previously,  any  bank  notes 
that  were  current  at  the  places  where  the  duties  and  taxes 
were  collected  had  been  accepted  by  the  Treasury,  although 
no  banks  except  those  of  New  England  were  at  that  time 
paying  specie. 


SECOND    BANK   OF   THE    UNITED    STATES        2J\ 

The  power  of  the  bank  to  issue  post  notes  was  curtailed 

in  the  charter,  both  as  to  the  size  of  the  notes  and  the  time 

they  should  run.  Post  notes  were  bank  notes 
Post  Notes.  "^  ,  ,  ,  -   ,  - 

payable,  not  on  demand,  but  at  a  future  time. 

They  were  a  means  of  borrowing  money  from  the  public  for 
fixed  periods  with  or  without  interest.  They  were  in  common 
use  in  the  first  quarter  of  the  nineteenth  century.  Some- 
times the  words  containing  the  date  of  payment  were  printed 
in  very  small  type,  so  that  they  were  not  readily  seen  and 
were  accepted  by  some  persons  for  demand  notes.  The 
recipients  were  thus  defrauded.  The  restriction  of  post 
notes  to  denominations  of  $ioo  or  more  was  made  in  order 
to  prevent  deception,  since  anybody  receiving  a  note  as  large 
as  $ioo  would  be  pretty  sure  to  examine  it  carefully  and  to 
know  whether  it  was  payable  on  demand  or  otherwise. 

The  provision  requiring  that  all  notes  issued  by  the  bank 
should  be  signed  by  the  president  and  the  principal  cashier 

was  adopted  because  that  was  the  customary 
Branch  Drafts.  r  •        •  rr^i  •     • 

way  of  issumg  such  notes.  There  was  a  simi- 
lar provision  in  the  charter  of  the  earlier  bank.  The  fact 
that  there  are  physical  limitations  on  the  power  of  a  man  to 
write  his  name,  and  that  this  bank  was  three  and  one-half 
times  as  large  as  the  former  one,  did  not  occur  to  anybody 
until  after  the  bank  had  gone  into  operation.  Then  it  was 
discovered  that  no  human  being  could  perform  the  necessary 
labor.  The  bank  officers  asked  Congress  to  amend  the  law 
so  as  to  allow  other  persons  to  sign  notes.  There  was  no 
reason  why  the  request  should  not  have  been  granted,  but 
Congress  took  no  action.  Consequently  the  bank  adopted 
the  practice  of  issuing  drafts  of  ^5.00  and  $10  at  the  several 
branches,  drawn  on  the  parent  bank.  These  drafts  passed 
into  circulation,  to  the  amount  of  several  millions.  When 
the  subject  of  a  recharter  of  the  bank  came  before  Congress 
the  issuing  of  these  drafts  was  assailed  as  a  violation  of  law, 


2/2  BANKING 

but  an  opinion  had  been  obtained  from  Horace  Binney, 
Daniel  Webster,  and  William  Wirt,  before  any  such  drafts 
were  issued,  that  they  would  be  legal. 

The  provision  in  reference  to  the  deposit  of  the  public 
funds  in  the  bank  became  very  important  in  the  subsequent 
bank  war  in  President  Jackson's  administration,  and  will  be 
considered  in  connection  with  that  event. 

The  clause  imposing  a  penalty  of  12  "per  cent  per  annum 
on  any  failure  to  pay  specie  on  demand  for  any  obligation 
of  the  bank  was  intended  to  make  the  suspen- 
Suspen^ion^  sion  of  specie  payments  unprofitable.     There 

were  in  existence  at  that  time  many  banks 
which  were  doing  a  flourishing  business  and  actually  paying 
dividends  to  their  stockholders,  but  were  not  redeeming 
their  own  notes,  or  paying  their  deposits,  except  in  the 
depreciated  notes  of  other  banks.  If  they  had  been  under 
a  penalty  of  12  per  cent  per  annum  on  all  their  defaulted 
paper,  they  would  have  made  haste  to  resume  specie  payments. 

It  would  not  be  good  policy  now  to  grant  exclusive  privi- 
leges to  a  private  bank,  but  if  for  any  reason  it  were  granted, 
it  would  be  proper  to  exact  a  bonus  from  the 
ch°rt   °^  beneficiaries.     The  exclusive  privilege  granted 

to  the  Bank  of  the  United  States  consisted  of 
the  deposits  of  the  government  without  interest,  of  the  right 
to  establish  branches  without  consulting  the  state  govern- 
ments, and  of  the  credit  which  those  extensive  privileges 
gave  it  in  the  eyes  of  the  people  and  of  foreign  nations. 

The    bank    established    twenty-five    branches    under   the 

authority  granted  to  it.     These  were  extremely  useful  to  the 

country  in  the  way  of  distributing  the  capital 
Branch  Banks.  ^     ,       ,        ,  ,  1  1 

of  the  bank  to  the  places  where  it  was  most 
needed.  Thus,  if  there  was  a  stronger  demand  for  money 
at  New  Orleans  than  at  Philadelphia,  knowledge  of  that  fact 
would  be    quickly  conveyed  by  the   branch  at  the  former 


SECOND   BANK   OF  THE   UNITED   STATES        273 

place  to  the  parent  bank,  and  funds  could  be  quickly  trans- 
ferred, either  from  the  parent  bank  or  from  any  branch  where 
the  demand  was  less  pressing.  One  advantage  of  branch 
banking  consists  in  the  facility  which  it  affords  for  gaining 
knowledge  of  the  relative  needs  of  business  in  different 
places  and  of  responding  promptly  to  those  needs  through 
agents  already  on  the  ground  possessing  the  necessary  local 
knowledge.  The  benefit  is  shared  equally  by  the  borrower 
and  the  lender.  Branch  banking  tends  to  equalize  the  rates 
of  interest  among  different  localities  in  the  same  country. 

The  charter  of  the  bank  was  made  the  basis  of  a  shame- 
ful speculation,  which  brought  it  to  the  verge  of  ruin  within 
two  years.  The  law  provided  that  the  stock 
B^^nnings  Subscriptions  of  individuals  should  be  paid  in 

three  instalments :  30  per  cent  at  the  time  of 
subscribing,  35  per  cent  in  six  months,  and  35  per  cent  in 
twelve  months.  One-fourth  of  the  private  subscriptions 
($7,000,000)  were  to  be  paid  in  specie  and  three-fourths  in 
specie  or  in  the  funded  debt  of  the  United  States.  When 
the  second  instalment  became  due  only  $324,000  was  paid  in 
specie  where  $2,800,000  was  due  ;  and  for  the  third,  only  a 
trifling  amount  of  specie  or  of  anything  else.  The  bank  had 
discounted  the  notes  of  the  stockholders  on  the  pledge  of 
their  stock  to  the  amount  of  more  than  $8,000,000.  It 
also  allowed  the  stock  to  be  sold  and  transferred  by  the 
subscribers  before  it  was  paid  for.  This  caused  a  great 
deal  of  trading  in  shares  and  a  rapid  advance  in  the  price. 
When  they  rose  above  par  the  bank  loaned  more  than  par 
on  them.  In  August,  18 17,  it  authorized  loans  as  high  as 
$125  on  $100  to  shareholders  who  would  furnish  other 
security  for  the  extra  $25.  This  was  easily  furnished,  as 
the  shareholders  indorsed  for  each  other. 

The  provision  of  the  charter  prohibiting  dividends  on 
shares  that  had  not  been  paid  in  full  had  been  systematically 


2/4  BANKING 

violated.  The  Baltimore  branch  had  been  defrauded,  by  its 
president  and  cashier,  of  $1,600,000.  The  bank  at  this 
time  was  really  insolvent  and  it  was  held  up  only  by  the 
government's  deposits,  which  amounted  to  $8,000,000.  It 
was  saved  from  impending  bankruptcy  by  Mr.  Langdon 
Cheves  of  South  Carolina,  who  became  its  president  in 
March,  1819."^  One  of  his  measures  of  relief  was  the  bor- 
rowing of  $2,500,000  in  Europe.  Another  was  the  require- 
ment that  the  loans  made  on  the  security  of  the  bank's 
shares  should  be  paid  at  the  rate  of  5  per  cent  every  sixty 
days.  "  Even  this  small  reduction,"  said  Mr.  Cheves  in  his 
first  official  report,  "  was  the  subject  of  loud,  angry,  and  con- 
stant remonstrance  among  the  borrowers,  who  claimed  the 
privileges  and  favors  which  they  contended  were  due  to 
stockholders." 

The  bank  was  put  in  a  solvent  condition  by  Mr.  Cheves, 
and  in  the  course  of  the  next  ten  years  became  established 
in  the  confidence  of  the  business  community 
.    g  ^^  and  interwoven  in  the  policy  of  the  nation  as 

fully  as  the  leading  banks  of  the  old  world 
are  now  in  their  respective  countries.  It  had  five  hun- 
dred employees  of  high  standing  and  social  position.  Nicho- 
las Biddle  of  Philadelphia  became  its  president  in  1823. 

Notwithstanding  the  cerulean  aspect  of  the  sky  overhead, 
there  was  a  cloud  gathering  on  the  western  horizon  which  is 
depicted  by  the  latest  historian  of  the  bank  in  the  following 
terms : 

Democracy,  devoted  to  the  principle  of  equaHty,  is  opposed  to 
all  forms  of  privilege,  and  to  none  more  than  to  a  monetary  monop- 
oly. When  it  is  recollected  that  the  Bank  of  the  United  States 
was  at  that  time  the  one  great  monopoly  in  the  country,  and  that 
against  it  were  directed  all  the  passionate  opposition  and  fear 
which  to-day  fall  upon  banks,  railroad  companies,  and  trusts,  its 
danger  from  the  rising  power  of  that  fierce  Democracy  which,  with 


SECOND  BANK  OF  THE   UNITED   STATES         2/5 

Andrew  Jackson,  swept  over  the  country,  may  be  faintly  measured. 
The  Democracy  was  positive  that  the  bank  was  a  menace  to  the 
political  and  social  interests  of  the  United  States  ;  that  it  made 
the  rich  richer  and  the  poor  poorer ;  that  it  depressed  the  weak 
and  made  the  potent  more  powerful ;  that  it  accentuated  the  differ- 
ences of  society,  creating  on  the  one  hand  a  powerful  aristocracy 
and  on  the  other  hand  an  impotent  and  beggarly  proletariat. 
These  opinions  were  especially  prevalent  in  the  West,  where 
Democracy  was  most  powerful.^ 

Before  he  came  to  Washington  as  President,  Jackson 
entertained  the  opinion  that  Congress  had  not  the  consti- 
tutional power  to  charter  a  bank  outside  of  the  District  of 
Columbia.    He  had  also  expressed  a  dislike  to  all  banks.^ 

RECAPITULATION 

The  second  Bank  of  the  United  States  was  established  in 
1816,  at  the  instance  of  President  Madison,  to  put  an  end  to 
the  disorders  in  the  currency  consequent  upon  the  War  of 
18 1 2.  The  capital  was  $35,000,000,  of  which  $7,000,000 
was  subscribed  by  the  government.  During  its  early  years 
the  bank  was  shamefully  mismanaged  and  narrowly  escaped 
destruction,  but  it  was  restored  to  a  sound  position  in  the 
year  18 19,  after  which  it  became  extremely  prosperous. 
The  charter  was  for  the  most  part  a  copy  of  that  of  the  first 
bank.  The  money  owned  or  collected  by  the  government 
at  places  where  the  bank  or  its  branches  existed  was  to  be 
deposited  in  the  bank  or  branches,  but  the  Secretary  of  the 
Treasury  might  remove  the  same  for  reasons  which  he  should 
communicate  to  Congress. 

1  Catterall's  The  Second  Bank  of  the  United  States,  p.  167, 

2  Catterall,  pp.  183-184. 


CHAPTER   VIII 
THE   BANK   WAR 

The  charter  of  the  great  bank,  granted  in  1816,  was  to 
expire  in  1836.  When  General  Jackson  came  to  Washington 
City  as  President  in  1829,  the  subject  of  a  renewal  of  the 
charter  had  not  been  discussed  either  in  Congress  or  in 
the  press.  Probably  nobody  had  given  it  serious  thought. 
There  had,  however,  been  some  conflicts  be- 
jRechartir°*  tween  the  bank  and  the  state  legislatures  of 
Ohio,  Kentucky,  and  Georgia,  prompted  by  the 
jealousies  of  the  local  banks.  The  latter  had  accused  the 
great  bank  of  "  accumulating  their  notes  "  and  then  present- 
ing them  for  redemption  in  coin,  thus  making  money  scarce 
and  disabling  them  from  lending  freely  to  their  own  cus- 
tomers. But  this  accumulating  of  the  notes  of  the  local 
banks  resulted  from  receiving  them  as  deposits.  Not  to 
have  received  them  would  have  discredited,  and  perhaps 
ruined,  the  banks  issuing  them.  To  have  received  them  as 
deposits  and  not  to  have  presented  them  for  payment  would 
have  been  to  transfer  the  capital  of  the  great  bank  to  the 
local  banks  without  interest.  From  this  dispute  had  arisen 
hostile  legislation  and  prolonged  litigation;  but  the  con- 
flicts had  ceased,  and  the  bank  was  at  the  height  of  its 
popularity  and  strength  at  the  beginning  of  Jackson's  admin- 
istration. 

The  first  visible  sign  of  the  coming  trouble  was  contained 
in  a  letter  written  by  Levi  Woodbury,  senator  from  New 
Hampshire,  to  Samuel  Ingham,  Secretary  of  the  Treasury, 

276 


THE   BANK   WAR  2/7 

making  complaints  against  Jeremiah  Mason,  one  of  the 
great  jurists  of  New  England,  who  was  the  president  of  the 
branch  bank  at  Portsmouth.  Woodbury  and  Mason  were 
political  rivals.  The  former  accused  the  latter 
PoiitiSfconflict.  °^  ^^^  manners,  of  partiality  in  the  making-of 
loans,  and  of  using  his  financial  influence  for 
political  ends.  Mr.  Ingham  referred  the  letter  to  Nicholas 
Biddle,  president  of  the  bank,  and  added  some  comments 
of  his  own,  implying  that  he  thought  there  might  be  some 
truth  in  Woodbury's  complaints. 

Three  weeks  later  Mr.  Isaac  Hill  of  New  Hampshire, 
second  comptroller  of  the  United  States  Treasury,  wrote  a 
letter  asking  for  a  change  in  the  board  of  directors  of  the 
Portsmouth  branch  of  the  bank  and  for  the  removal  of  Mr. 
Mason  as  president.  The  letter  was  addressed  to  two  of 
Hill's  friends  in  Philadelphia,  who  were  requested  to  present 
to  the  parent  bank  two  petitions  to  that  end,  signed  by  citi- 
zens of  New  Hampshire,  which  were  inclosed  in  his  letter. 
Hill  had  been  the  editor  of  a  rancorous  Demo- 
cratic newspaper  and  latterly  president  of  a 
small  bank  in  Concord,  for  which  he  wished  to  secure  the 
pension  deposits,  which  were  placed  by  law  in  the  Ports- 
mouth branch  of  the  great  bank. 

A  few  months  later  Amos  Kendall,  fourth  auditor  of  the 
Treasury,   wrote   a   letter  to   Ingham,   making  accusations, 
which  were  afterwards  shown  to  be  false,  against  the  Louis- 
ville branch  of  the  bank,  charging  that  it  had 
Amos  Kendall.        .  .        ,  .  ,        .  ,  .     °  ^, 

interfered  in  an  election  there  in  1825.    These 

letters  proved  that  there  were  politicians  in  Washington,  near 
to  the  President,  who  had  private  and  sinister  ends  to  gain 
by  attacking  the  bank.  They  accomplished  their  object,  by 
persuading  him  that  the  bank  was  taking  part  in  politics 
secretly  and  against  himself.  The  charge  was  false :  the 
bank  never  meddled  with  politics  until  compelled  to  do  so 


2/8  BANKING 

in  self-defense.     It  is  possible,   however,  that  its  enemies 
believed  that  it  was  doing  so.^ 

Biddle  was  led  to  believe,  by  conversations  with  Major 
Lewis,  a  close  friend  of  Jackson,  and  also  with  Jackson  him- 
self, that  the  latter  would  favor,  or  at  all  events  not  oppose, 
a  renewal  of  the  bank's  charter.  Yet  an  undated  paper  in 
Jackson's  handwriting,  addressed  to  Biddle,  was  subse- 
quently found  among  his  manuscripts,  sayii^g  that  he 
(Jackson)  had  read  the  opinion  of  Chief  Justice  Marshall 
affirming  the  constitutionality  of  the  bank,  and  that  he 
could  not  concur  with  it.  Biddle  was  greatly  surprised  to 
read  in  Jackson's  first  annual  message  to  Congress,  Decem- 
ber 8,  1829,  the  following  paragraph  : 

The  charter  of  the  Bank  of  the  United  States  expires  in  1836, 
and  its  stockholders  will  most  probably  apply  for  a  renewal  of 

their  privileges.  In  order  to  avoid  the  evils  result- 
jac  son's    irs        -^^^  from  precipitancy  in  a  measure  involving  such 

important  principles,  and  such  deep  pecuniary 
interests,  I  feel  that  I  cannot,  in  justice  to  the  parties  interested, 
too  soon  present  it  to  the  deliberate  consideration  of  the  Legisla- 
ture and  the  people.  Both  the  constitutionality  and  the  expediency 
of  the  law  creating  this  bank  are  well  questioned  by  a  large  portion 
of  our  fellow-citizens  J  and  it  must  be  admitted  by  all,  that  it  has 
failed  in  the  great  end  of  establishing  a  uniform  and  sound  currency. 

The  statement  that  the  bank  had  failed  in  the  great 
end  of  establishing  a  uniform  and  sound  currency  puzzled 

1 "  When,  in  any  arena,  a  power  is  present  which  might  be  of  decisive 
importance  as  an  ally  of  one  party  or  the  other,  it  is  inevitable  that  its 
alliance  will  be  contended  for  by  them.  Its  efforts  to  remain  neutral 
will  be  vain  and  will  expose  it  to  greater  danger  from  both  than  an 
alliance  with  either.  Either  party  which  thinks  that  it  has  lost  the 
chance  of  winning  the  alliance  will  turn  against  the  intervening  party 
with  fierce  animosity  and  will  try  to  destroy  it  or  drive  it  from  the 
arena.  This  is  what  happened  in  the  case  of  the  United  States 
Bank."  —  Sumner's  Bankings  p.  192. 


THE  BANK  WAR  2/9 

everybody,  since  that  was  the  very  thing  that  the  bank  had 
accomplished  with  conspicuous  success.  It  remains  doubt- 
ful to  this  day  what  Jackson  meant  by  it. 
meiJtf  ^*^*^'  Albert  Gallatin  tried  to  find  out  from  Jackson 
himself  in  what  particular  the  bank  had  so 
failed,  but  could  glean  only  mild  surprise  that  such  a  ques- 
tion should  be  asked.  Gallatin  inferred  that  Jackson  meant 
that  the  bank  had  not  entirely  abolished  the  rate  of  exchange 
between  different  commercial  centers.^ 

The  bank  had  been  established  expressly  to  restore  specie 
payments.  This  end  had  been  accomplished  mainly  through 
its  efforts  and  example.  In  order  to  facilitate  resumption 
it  had  assumed  at  par  $10,809,000  of  government  deposits 
then  in  suspended  banks,  at  a  cost  to  itself  of  some  $200,- 
000.^  The  whole  banking  system  of  the  country  had  been 
wonderfully  toned  up  since  it  came  into  the  field.  The  rate 
of  exchange  between  the  most  widely  separated  commercial 
centers  ranged  between  par  and  one-half  of  i  per  cent,  —  a 
condition  which,  according  to  a  report  of  the  Senate  Com- 
mittee on  Finance,  existed  in  no  other  country.^ 

On  December  10  the  part  of  the  President's  message 
relating  to  the  Bank  of  the  United  States  was  referred  by 
the  House  to  the  Committee  of  Ways  and  Means.  Its 
chairman  (McDuffie  of  South  Carolina)  made  a  report  on 
April  13,   1830,  controverting,  in  respectful  and  temperate 

1  The  average  rate  was  probably  from  par  to  li  per  cent,  the  aver- 
age for  1829  being  less  than  |  of  i  per  cent.  —  Catterall,  p.  141. 

2  Clarke  and  Hall,  p.  777. 

3  <'  Before  this  bank  went  into  operation  exchange  was  from  eight  to 
ten  per  cent  either  for  or  against  Charleston,  which  was  a  loss,  to  the 

planter,  of  that  amount  on  all  the  produce  of  Georgia 
g^^jj,  and  South  Carolina  and  indeed,  you  might  say,  all 

the  produce  of  the  Southern  and  Western  states."  — 
Letter  of  a  Charleston  merchant  to  the  chairman  of  the  Committee 
of  Ways  and  Means  (Clarke  and  Hall,  p.  760). 


28o  BANKING 

terms,  the  President's  position  at  all  points.  The  report 
was  strong  in  its  opposition  to  the  statement  that  the  bank 
had  failed  in  the  great  end  of  establishing  a  uniform  and 
sound  currency.  It  was  easy  to  prove  by  the  market  quo- 
tations how  far  superior  the  currency  was  then  to  that 
of  any  previous  time,  and  especially  to  that 
by  congresl!"^*^  of  the  period  immediately  before  the  establish- 
ment of  the  bank,  when  the  paper  currency  of 
the  middle  states  ranged  from  7  to  25  per  cent  below  par. 
The  report  went  beyond  a  mere  statement  of  the  fact  that 
the  currency  had  been  put  on  a  uniform  and  sound  basis. 
It  argued  strongly  that  this  improvement  had  been  brought 
about  by  the  Bank  of  the  United  States  and  would  not  have 
taken  place  otherwise.     It  said : 

The  Committee  are  aware  that  the  opinion  is  entertained  by 
some  that  the  local  banks  would,  at  some  time  or  other,  either  vol- 
untarily or  by  the  coercion  of  the  state  legislatures,  have  resumed 
specie  payments.  In  the  very  nature  of  things  this  would  seem 
an  impossibility.  It  must  be  remembered  that  no  banks  ever 
made  such  large  dividends  as  were  realized  by  the  local  institu- 
tions during  the  suspension  of  specie  payments.  A  rich  and 
abundant  harvest  of  profit  was  opened  to  them,  which  the  resump- 
tion of  specie  payments  must  inevitably  blast. 
The  Previous  While  permitted  to  give  their  own  notes  bearing  no 
interest,  and  not  redeemable  in  specie,  in  exchange 
for  better  notes  bearing  interest,  it  is  obvious  that  the  more  paper 
they  issued  the  higher  would  be  their  profits.  The  most  powerful 
motive  that  can  operate  upon  moneyed  corporations  would  have 
existed  to  prevent  the  state  banks  from  putting  an  end  to  the  very 
state  of  things  from  which  their  excessive  profits  proceeded. 
Their  very  nature  must  have  been  changed,  therefore,  before  they 
could  have  been  induced  to  cooperate  voluntarily  in  the  restora- 
tion of  the  currency.  It  is  quite  as  improbable  that  the  state 
legislatures  would  have  compelled  the  banks  to  do  their  duty.  .  .  . 
The   banks  were,  directly  and   indirectly,  the   creditors   of  the 


THE   BANK  WAR  28 1 

whole  community,  and  the  resumption  of  specie  payments  neces- 
sarily involved  a  general  curtailment  of  discounts  and  withdrawal  of 
credit  which  would  produce  a  general  and  distressing  pressure  upon 
the  entire  class  of  debtors.  These  constituted  the  largest  portion 
of  the  population  of  all  the  states  where  specie  payments  were  sus- 
pended and  bank  issues  excessive.  Those,  therefore,  who  controlled 
public  opinion  in  the  states  where  the  depreciation  of  the  local 
paper  was  greatest  were  interested  in  the  perpetuation  of  the  evil. 

The  report  of  the  Committee  was  sustained  by  a  decisive 
majority  of  the  House,  and  a  similar  one  from  the  Senate 
Committee  on  Finance  was  sustained  by  that  body. 

There   was   some    correspondence   between    Biddle    and 

Ingham  in  reference  to  the  charges  made  by  Woodbury  and 

Hill  against  Jeremiah  Mason.     Biddle  easily  proved   that 

the  charges  were  without  foundation.    It  would 

f^^^ltvf"*^  have  been  well  for  him  if  he  had  rested  there  ; 

Ingham.  ' 

but  he  thought  that  he  had  detected  in  Ing- 
ham's letters  the  assertion  of  a  right  on  the  part  of  the 
administration  to  control  or  influence  the  bank's  selection 
of  its  officers,  and  he  wished  to  let  Ingham  know  that  this 
was  a  mistake.  He  therefore  added  that  the  bank  was 
under  no  responsibility  to  the  Secretary  of  the  Treasury 
respecting  the  political  opinions  of  its  officers.  Ingham 
retorted  that  the  Secretary  had  power  to  remove  the  govern- 
ment's deposits  from  the  bank,  and  that  he  might  exercise 
that  power,  if  he  were  convinced  that  the  bank  was  exer- 
cising political  influence.  In  his  literary  and  forensic  zeal 
Biddle  had  overlooked  the  power  of  coercion  that  lay  in  the 
hands  of  the  Secretary.  He  was  worsted  in  this  encounter, 
but  his  error  of  tactics  was  not  necessarily  fatal. 

In  his  message  of  1830  the  President  again  alluded  to  the 
bank,  and  suggested  that  a  bank  might  be  established  as  a 
branch  of  the  Treasury  Department,  in  order  to  avoid  con- 
stitutional objections.     Such  a  bank,  he    said,  having   no 


282  BANKING 

means  to  operate  on  the  hopes,  fears,  or  interests  of  large 
masses  of  the  community,  would  be  shorn  of  the  influence 

which  made  the  existing  bank  formidable.  A 
sage^f^is  ^^^'      "lotion  was  made  in  the  House  to  refer  this 

part  of  the  message  to  a  special  committee, 
on  the  ground  that  the  Committee  of  Ways  and  Means 
had  already  given  its  opinion  in  favor  of  the  present  bank. 
This  motion  was  voted  down,  by  io8  to  76. 

In  1 83 1  the  message  took  a  milder  tone,  saying  that  the 
President  had  felt  it  his  duty  frankly  to  disclose  his  opinions 

on  the  subject  in  former  messages. 

Milder  Tone  of  tt      •        ^u  •      x-        1      j"    u  ^ 

the  President.  Havmg  thus  conscientiously  discharged  a  con- 

stitutional duty  [he  continued],  I  deem  it  proper 
on  this  occasion,  without  a  more  particular  reference  to  the  views 
on  the  subject  then  expressed,  to  leave  it  for  the  present  to  the 
investigation  of  an  enlightened  people  and  their  representatives. 

The  bank's  charter  ran  till  1836.  There  is  good  reason 
to  believe  that  if  Biddle  had  postponed,  until  after  the  presi- 
dential election  of  1832,  his  attempt  to  procure  its  renewal, 
he  might  have  obtained  it  without  any  serious  opposition  and 
with  the  concurrence  of  the  President.  All  the  members  of 
the  cabinet,  except  Taney,  were  favorable  to  the  bank,  and 
two  of  them  (McLane  and  Livingston,  of  the  Treasury  and 
State  Departments)  actively  so.  Both  of  these  urgently 
counseled  him  not  to  stir  up  the  fighting  element  in  Jack- 
son, and  not  to  incur  the  risk  of  embroiling  the  bank  in  the 
political  campaign.  In  a  letter  to  James  Hamilton  (Decem- 
ber 12,  183 1),  Jackson  said  :  "  Mr.  McLane  and  myself  under- 
stand each  other,  and  have  not  the  slightest  disagreement 
about  the  principles  which  will  be  a  sine  qua  non  in  my  assent 
to  a  bill  rechartering  the  bank."  ^ 

Biddle  was  a  headstrong  character  and  was  the  autocrat 
of  the  bank.  He  had  always  maintained  heretofore  that  the 
1  Catterall,  p.  213. 


THE  BANK  WAR  283 

bank  should  not  meddle  with  politics.  He  had  once  affirmed 
in  writing  that  if  the  bill  for  a  new  charter  were  brought 
forward  prematurely,  it  would  be  "  blended  up  with  the  elec- 
tion and  become  one  of  those  political  matters  judged  ex- 
clusively by  party  considerations."  He  was  warned  by 
McLane  that  if  the  bill  were  forced  upon  Jackson  before 
the  election  he  would  regard  it  as  a  challenge  and  would 
veto  it.  Why,  then,  did  Biddle,  with  this  enormous  responsi- 
bility resting  upon  him,  take  the  risk  of  giving  the  challenge  ? 

In  the  first  place  the  party  opposed  to  Jackson  (the 
National  Republicans)  made  the  bank  question  an  issue  in 
their  platform,  adopted  at  the  Baltimore  Con- 
formTu!3T^'  vention  in  December,  183 1.  They  declared 
that  the  bank  was  a  great,  beneficent,  and 
necessary  institution,  and  that  the  President  was  "  fully  and 
three  times  over  pledged  to  the  people  to  negative  any  bill 
that  might  be  passed  for  rechartering  the  bank."  This  con- 
vention nominated  Henry  Clay  for  President  in  opposition 
to  Jackson.  Mr.  Clay,  however,  was  not  primarily  an  agent 
in  dragging  the  bank  into  politics.  Mr.  Catterall  shows  that 
he  deprecated  the  policy  of  making  applica- 
the°^nk^^^°  tion  for  a  new  charter  before  the  Presidential 
election.  He  held  to  that  opinion  till  the  eve 
of  the  Baltimore  convention,  but  he  sided  with  his  party, 
whose  candidate  he  was,  when  its  platform  was  promulgated. 

The  bank  had  been,  until  this  time,  a  non-resistant,  and 
that  was  one  reason  why  Jackson's  animosity  had  cooled. 
It  was  still  reluctant  to  enter  the  political  arena.  Biddle 
hesitated,  but  was  finally  persuaded  by  the  argument  that 
the  bank  must  put  itself  in  the  hands  of  its  friends  rather 
than  of  its  enemies.  Accordingly,  he  wrote  a  memorial  ask- 
ing for  a  renewal  of  the  charter,  which  was  presented  to  the 
Senate  on  the  9th  of  January,  1832.  The  old  charter  still  had 
four  years  to  run.    The  motion  for  a  renewal  of  it  at  this 


284  BANKING 

time  was  premature,  unless  the  friends  of  the  bank  wanted 
to  make  it  a  political  issue  against  Jackson  in  the  presidential 
campaign.-^ 

Before  any  vote  was  taken  in  Congress,  however,  an  inci- 
dent occurred  which  led  Jackson  to  think  that  the  bank  was 

financially  unsound.  On  the  24th  of  March, 
fpefclts!  ^^32,  Mr.  Asbury  Dickins,  Acting  Secretary 

of  the  Treasury,  notified  Mr.  Biddle  confiden- 
tially that  the  government  desired  to  apply  a  portion  of  its 
money  deposited  in  the  bank  to  the  payment  of  the  out- 
standing 3  per  cents,  —  a  remnant  of  the  revolutionary  debt. 
The  public  deposits  now  amounted  to  $12,000,000,  and  the 
debt  to  be  paid  off  was  $9,000,000.  Secretary  McLane 
gave  Mr.  Biddle  formal  notice  of  this  purpose  on  the  25th 
of  July,  and  Biddle  replied  that  the  bank  would  take  the 
necessary  steps  to  get  possession  of  the  bulk  of  the  3  per 
cents  and  would  act  in  accordance  with  the  wishes  of 
the  government.  In  the  meantime  General  Cadwalader,  a 
director  of  the  bank,  had  been  sent  to  London  to  make  a 
private  arrangement  with  the  Barings  for  postponing  the 
payment  of  $5,000,000  of  the  debt.  A  contract  was  made 
with  that  house  to  extend  as  many  of  the  3  per  cents  as 
possible  and  to  buy  up  the  rest.  This  was  a  violation  of 
the  bank's  charter,  which  prohibited  it  from  purchasing  any 
public  stocks.  It  was  equally  a  violation  of  the  under- 
standing with  the  Treasury;  since,  under  the  Baring  con- 
tract, the  3  per  cents  would  be  kept  alive,  the  bank 
paying  the  interest  and  being  responsible  eventually  for  the 

1  "  The  position  then  was  that  Jackson  had  made  the  challenge,  had 
receded  from  it,  and  his  opponents  had  taken  it  up  and  turned  it  as  a 
challenge  against  him.  What  would  he  do  ?  It  seems  that  no  one  who 
knew  the  facts  in  his  career  could  doubt  what  he  would  do.  He  would 
return  to  the  issue  and  would  fight  it  out  regardless  of  all  considerations 
whatever,  to  a  definite  and  conclusive  victory  or  defeat.  That  is  what 
he  did  do."  —  Sumner's  Banking,  p.  200. 


THE   BANK   WAR  285 

principal.  Money  was  worth  7  per  cent  to  the  bank;  and 
by  this  scheme  it  would  obtain  the  use  of  the  government's 
money  at  3  per  cent. 

It  was  Biddle's  intention  to  keep  the  matter  secret,  but 
the  Baring  circular  was  published  in  the  newspapers  in 
October.  Biddle  immediately  disavowed  Cadwalader's  con- 
tract with  the  Barings,  in  so  far  as  related  to  the  buying  of 

the  debt,  and  proposed  a  different  arrange- 
Dupucfty.^'^         ment.     Secretary  McLane  called  on    Biddle 

for  explanations,  and  the  latter  replied  that  he 
had  taken  this  step  for  the  public  good.  A  visitation  of 
cholera  was  expected,  which  threatened,  he  said,  "  if  it  con- 
tinued, to  press  with  peculiar  force  on  the  public  revenue, 
more  especially  as  the  demand  on  account  of  the  foreign 
holders  of  3  per  cents  on  the  first  of  October,  at  New  York 
and  Philadelphia  alone,  would  have  exceeded  five  millions 
of  dollars."  So  the  bank  had  interposed  itself  as  a  provi- 
dence between  the  people  and  the  government  because 
the  cholera  was  expected,  and  had  done  so  in  a  clandes- 
tine manner.  Jackson  was  fully  justified  in  considering 
this  a  subterfuge,  and  was  freshly  exasperated  by  it ; 
but  it  did  not  follow,  as  he  supposed,  that  the  bank  was 
insolvent. 

The  affair  of  the  3  per  cents  was  going  on  while  Con- 
gress was  acting  on  the  new  charter.  On  the  9th  of  June 
the  bill  passed  its  third  reading  in  the  Senate,  by  25  to  20. 
Now  the  friends  of  the  bank,  who  were  also  friends  of  the 
President,  made  one  more  effort  to  prevent  a  conflict.  They 
entreated  Mr.  Biddle  to  pause  and  let  the  bill  rest  until  after 
the  election.  If  he  had  had  his  choice,  he  might  have  taken 
this  advice;  but  he  was  "threatened  with  opposition  from 
the  party,  then  his  chief  reliance,  unless  he  went  on."^ 
They  said  that  Jackson  would  not  dare  to  veto  the  bill,  and 
1  Ingersoll,  II,  269. 


286  BANKING 

that  if  he  did,  he  would  be  hurled  from  powei  by  an  indig- 
nant people.  So  they  passed  the  bill  in  both  houses  and 
sent   it  to   the   President  on   the   6th   of  July.     Then  one 

more  challenge  was  given  to  him.  The  House 
S^s^d^.^"*''  on  the  28th  of  June  had  voted  to  adjourn  on 

the  9  th  of  July,  and  the  resolution  was  not 
acted  on  by  the  Senate  until  the  9th.  Then  Mr.  Webster 
said  that  there  was  an  important  measure  under  considera- 
tion by  the  Executive,  which  he  was  not  compelled  to  return 
in  less  than  ten  days.  The  House  resolution  was  then 
amended,  by  inserting  the  i6th.  This  was  equivalent  to 
saying  to  the  President :  "  You  must  sign  the  bill  or  veto  it. 
You  shall  not  kill  it  silently." 

The  next  day,  July  10,  the  veto  came.  It  was  perfectly 
adapted  to  its  purpose  of  winning  votes.     It  dealt  with  the 

bank  as  a  monopoly,  ringing  all  possible 
vetoed^^^^'^  changes  on  that  term,  and  in  the  most  skillful 

manner.  It  is  supposed  that  Amos  Kendall 
wrote  it ;  for,  although  Jackson  was  no  demagogue,  this  was 
a  most  demagogical  appeal.  The  friends  of  the  bank  were 
in  high  glee  when  they  saw  it.     Biddle  wrote  to  Clay: 

I  have  always  deplored  making  the  bank  a  party  question,  but 
since  the  President  will  have  it  so,  he  must  pay  the  penalty  of  his 
own  rashness.  As  to  the  veto  message,  I  am  delighted  with  it. 
It  has  all  the  fury  of  a  chained  panther  biting  the  bars  of  his  cage. 
It  is  really  a  manifesto  of  anarchy,  such  as  Marat  or  Robespierre 
might  have  issued  to  the  mob  of  the  Faubourg  St.  Antoine ;  and 
my  hope  is  that  it  will  contribute  to  relieve  the  country  from  the 
dominion  of  these  miserable  people.  You  are  destined  to  be  the 
instrument  of  that  deliverance,  and  at  no  period  of  your  life  has 
the  country  ever  had  a  deeper  stake  in  you.  I  wish  you  success 
most  cordially,  because  I  believe  the  institutions  of  the  Union  are 
involved  in  it.^ 


1  Parton's  Life  of  Jackson,  III,  41 1. 


THE   BANK  WAR  2Sy 

This  was  not  the  first  time  that  Biddle's  literary  talents 
had  betrayed  him.     Four  months  later  he  and  Mr.  Clay  and 
the  bank  went  down  with  a  grand  crash,  for 
Jackson's  Jackson  was  reelected  by  219  electoral  votes, 

to  67  for  all  others.  Mr.  Clay  received  49. 
Nobody  at  the  present  day  considers  Biddle  a  good  banker. 
Few  persons  regret  the  Bank  of  the  United  States ;  but  if 
its  taking  off  was  a  national  misfortune,  Mr.  Clay  and  his 
party  were  as  much  to  blame  as  General  Jackson  and  his 
party.  They  made  the  bank  a  political  issue  at  a  time  when 
defeat  to  them  meant  destruction  to  it.  The  attempt  to  pass 
the  bill  over  the  veto  failed  in  the  Senate,  22  to  19. 

The  bank  war  continued  through  the  whole  of  Jackson's 
second  administration,  embracing  several  exciting  episodes, 
but  they  belong  rather  to  the  political  than  the  financial  his- 
tory of  the  time.  Early  in  1833  ^^^  President 
^mover^^*^  decided  that  the  government's  deposits  ought 
to  be  removed  from  the  bank.  He  suggested 
this  project  to  Secretary  McLane,  who  demurred.  The  mat- 
ter was  brought  up  in  the  Cabinet,  and  two-thirds  of  the 
members  sided  with  McLane.  A  vacancy  happening  in  the 
State  Department,  McLane  was  transferred  to  it,  and  William 
J.  Duane  was  appointed  Secretary  of  the  Treasury.  Duane 
had  been  opposed  to  the  original  charter  of  the  bank  and  to 
the  recharter,  but  he  looked  upon  the  public  deposits  as  a 
part  of  a  contract  between  the  government  and  the  bank. 
He  declined  to  transfer  them,  when  requested  by  the 
President  to  do  so.  Consequently  he  was  removed  from 
office,  and  Roger  B.  Taney,  the  Attorney-General,  was 
placed  at  the  head  of  the  Treasury  Department.  Taney 
began,  in  the  autumn  of  1833,  to  draw  out  the  money 
for  ordinary  disbursements,  depositing  the  ordinary  receipts 
in  certain  state  banks  which  had  been  selected  for  the 
purpose. 


288  BANKING 

When  all  hope  of  a  renewal  of  the  national  charter  had 
disappeared,  Mr.  Biddle  sought  and  obtained  a  charter  from 
the  state  of  Pennsylvania.  An  enormous  bonus  was  paid 
to  the  state,  —  $2,500,000  in  cash  and  a  promise  of  $100,000 
per  year  for  twenty  years,  besides  various  subscriptions  to 
the  stock  of  railroads,  canals,  and  turnpikes  in  the  state. 
Senator  Benton  said  that  every  circumstance  of  its  enact- 
ment betokened  bribery  of  the  members  who  passed  it  and 
an  attempt  to  bribe  the  people  by  distributing  the  bonus 
among  them.  The  government  was  still  a  shareholder  in 
the  bank  to  the  par  value  of  $7,000,000,  and 
vania  Charter  there  was  some  trouble  in  withdrawing  this 
money,  but  it  was  paid  in  four  annual  instal- 
ments at  the  rate  of  1 15.58.  New  stock  was  sold  in  place  of 
it,  so  that  the  capital  remained  at  $35,000,000,  which  was  a  far 
greater  sum  than  could  be  used  in  ordinary  banking  opera- 
tions in  its  restricted  territory.  Jackson's  plans  were  now 
fully  carried  out,  except  that  the  bank  was  not  killed.  The 
government  had  recovered  every  dollar  of  its  own  money, 
and  the  bank  was  on  the  way  to  kill  itself  more  miserably 
than  even  its  enemies  could  have  wished. 

When  the  bank  found  itself,  with  its  enormous  capital, 
restricted  to  Philadelphia  and  the  neighboring  country,  it 
gradually  changed  its  character.     Hitherto  it 
Jtioif^^^^"  ^^^  confined  itself  to  its  proper  business,  dis- 

counting commercial  paper,  buying  bills  of 
exchange,  and  dealing  in  coin  and  bullion.  Now  it  advanced 
money  largely  on  stocks.  Before  March,  1836,  it  had 
$20,000,000  thus  invested.  The  country  was  in  the  fever 
of  speculation  which  culminated  in  the  panic  of  1837,  and 
the  bank  was  the  leading  speculator.  It  suspended  in  1837, 
in  common  with  nearly  all  the  other  banks ;  again  in  1838  ; 
and  a  third  and  last  time  in  1841.  Its  liquidation  was  pro- 
tracted through  fifteen  years.      It  paid  its  creditors  in  full, 


THE  BANK  WAR  289 

principal  and  interest,  but  the  shareholders  lost  every  penny. 

Biddle  lost  all  of  his  own  money.     His  town  house  and  his 

country  house  were  sold  by  the  sheriff.     Old 

^i!f  ^°"?'^       friends  cut  him  on  the  street.     He  was  even 
of  the  Bank. 

indicted  by  the  grand  jury  for  conspiracy  to 
defraud  the  shareholders  of  the  bank,  but  the  indictment 
was  quashed.     He  died  in  1844,  poor  and  broken-hearted. 


RECAPITULATION 

The  second  Bank  of  the  United  States  became  involved 
in  political  strife  through  no  fault  of  its  own.  In  the  year 
1829  certain  politicians,  who  were  on  terms  of  intimacy 
with  President  Jackson,  desired  to  have  the  president  and 
directors  of  the  branch  bank  at  Portsmouth,  N.  H.,  removed 
for  their  own  private  ends.  Mr.  Biddle,  the  president  of 
the  parent  bank,  refused  to  comply  with  their  wishes.  They 
persuaded  the  President  that  the  bank  was  secretly  taking 
part  in  politics  adversely  to  himself.  Although  the  charter 
had  seven  years  still  to  run,  President  Jackson,  in  his  first 
message  to  Congress  (December,  1829),  made  a  hostile  ref- 
erence to  the  bank,  suggesting  doubts  as  to  its  constitution- 
ality and  affirming  that  it  had  failed  of  the  main  purpose 
for  which  it  was  established.  Both  houses  of  Congress  took 
action  upon  the  message,  in  a  sense  favorable  to  the  bank. 
In  1830  the  President  again  referred  to  the  bank  in  his 
annual  message,  but  his  tone  was  less  hostile  than  before. 
In  183  T  he  approached  the  subject  again,  but  in  a  still  milder 
way,  saying  that  he  should  now  leave  the  question  to  the 
enlightened  judgment  of  Congress  and  the  people. 

The  party  opposed  to  Jackson  mistook  his  change  of  tone 
for  a  symptom  of  fear,  and  decided  to  make  the  recharter 
of  the  bank  the  main  political  issue  of  the  presidential  cam- 
paign of  1832.      They  framed  their  platform  accordingly 


290  BANKING 

and  nominated  Henry  Clay  for  the  presidency.  Jackson 
accepted  the  challenge  and  resumed  his  fight  against  the 
bank.  While  the  political  contest  was  going  on,  Congress 
passed  a  bill  for  a  new  charter,  the  President  vetoed  it,  and 
the  attempt  to  pass  it  over  the  veto  failed.  President  Jack- 
son was  reelected  by  a  large  majority  in  1832.  In  the  fol- 
lowing year  he  caused  the  government's  deposits  in  the 
bank  to  be  removed  from  it.  Before  the  charter  expired  the 
president  of  the  bank  obtained  a  charter  from  the  legis- 
lature of  Pennsylvania  and  reorganized  the  bank  under  it 
with  the  same  capital  ($35,000,000).  This  was  too  large  a 
sum  to  be  profitably  employed  in  the  discount  of  commercial 
paper  in  Philadelphia.  The  bank  then  entered  into  various 
speculations  by  advancing  money  on  the  shares  of  joint 
stock  companies  in  all  parts  of  the  Union.  It  failed  dis- 
astrously in  1841,  and  the  shareholders  lost  their  entire 
capital.  The  government  had  ceased  to  be  a  stockholder 
in  1836,  its  shares  having  been  paid  off  at  a  premium  of 
15^  per  cent. 

Both  the  first  and  the  second  banks  of  the  United  States 
became  involved  in  political  strife  without  any  intention  of 
their  own,  and  in  spite  of  their  earnest  efforts  to  avoid  such 
entanglements. 

Authorities  for  Chapters  VII  and  VIII 

Parton's  Life  of  Andrew  Jackson. 

Sumner's  Life  of  Andrew  Jackson. 

Schurz's  Life  of  Henry  Clay. 

Belles'  Financial  History  of  the  United  States. 

Bourne's  History  of  the  Surplus  Revenue  of  iSsy. 

Duane's  Narrative  and  Correspondence. 

Catterall's  The  Second  Bank  of  the  United  States. 


CHAPTER    IX 
THE   SUFFOLK  BANK   SYSTEM 

The  growth  and  development  of  banking  in  Massachusetts 
not  only  form  an  interesting  chapter  in  our  economic  his- 
tory, but  give  us  suggestions  of  the  highest  importance  in 
the  consideration  of  current  banking  problems. 

During  the  first  half  of  the  nineteenth  century  there  was 

a  struggle  in  Massachusetts,  as  in  nearly  all  the  states,  to 

compel  the   subscribing   shareholders  of  banks  to  pay  for 

•their  shares.     Bankino:  was  the  favorite  form 
stock  Notes. 

of  speculation.      A  bank   lends  its  notes  to 

borrowers  and  receives  interest  on  them,  but  the  notes  are 
themselves  debts  of  the  bank.  Thus  banking  presented 
itself  to  the  public  mind  seductively  as  a  method  of  living 
on  the  interest  of  the  debts  you  owe.  Bank  charters  were 
eagerly  sought.  The  speculators  in  shares  were  not  slow  to 
perceive  that,  if  they  could  put  their  own  stock  notes  into 
the  bank  instead  of  cash,  they  might  get  something  for  noth- 
ing.^ If  the  bank  survived,  the  dividends  would  probably 
exceed  the  interest  on  the  stock  notes,  the  difference  being 
a  clear  gain  to  the  shareholders,  without  any  investment  of 
their  own  money.  The  policy  of  Massachusetts  in  this 
regard  was  generally  sound,  but  it  was  variable,  showing  that 
some  people  could  get  inserted  in  bank  charters  privileges 
which  others  could  not  get.  In  1795  the  charter  of  the 
Nantucket  Bank  contained  a  provision  that  no  stockholder 

1  Professor  Sumner  found  two  state  bank  charters,  both  in  Louisiana, 
which  expressly  authorized  the  payment  of  the  capital  in  stock  notes, 
one  dated  181 1  and  the  other  1818.  — History  of  Banking,  p.  61. 

291 


292  BANKING 

should  be  allowed  to  borrow  at  the  bank,  as  or  after  any 
instalment  should  become  due,  until  he  should  have  paid 
his  full  proportion  of  such  instalment.  This  did  not,  how- 
ever, prevent  borrowing  the  money  after  it  had  been  paid  in. 
In  the  following  year  the  Merrimac  Bank  of  Newburyport 
was  chartered  with  a  capital  stock  of  not  less  than  $70,000, 
nor  more  than  $150,000.  Here  we  find  an  attempt  to  evade 
the  principle  affirmed  in  the  charter  of  the  Nantucket  Bank. 
No  loans  were  to  be  made  to  shareholders  until  they  had 
paid  their  proportion  of  $70,000.  If  they  should  choose  to 
have  a  capital  of  $150,000,  they  might  borrow  from  the  bank 
itself  all  except  the  first  $70,000. 

There  was  much  contrariety  of  legislation  until  1804,  when 
several  charters  contained  an  express  provision  that  no 
money  should  be  loaned  to  anybody  until  satisfactory  evi- 
dence was  presented  to  the  governor  and  council  "  that  the 
whole  capital  stock  aforesaid  is  actually  paid  in  and  existing 
in  gold,  silver,  or  other  coined  metals,  in  their  vaults."  Even 
this  provision  was  not  sufficient ;  for  it  was 

struggle  to  proved  in  more  than  one  case  that  banks  bor- 

compel  Payment  ,     .  .  r     1     •  •     1    • 

of  Capital  Stock,    rowed  the  entire  amount  or  their  capital  in 

gold  and  silver  coin  from  other  banks  and, 

having  exhibited  it  to  the  public  officers,  returned  it  to  the 

rightful  owners  the  same  day.     Accordingly,  in  181 1,  a  clause 

was  inserted  in  bank  charters  requiring  the  directors  to  take 

an  oath  that  the  money  paid  in  was  intended  to  remain  there 

as  the  capital  of  the  bank.     This  proviso  was  considerably 

amplified  and  strengthened  in  18 13.     Three  commissioners 

were  to  be  appointed  by  the  governor  to  count  the  gold  and 

silver  and  take  the  oath  of  the  directors  that  it  had  been 

paid  in,  bona  Jide,  by  the  stockholders  as  the  bank's  capital 

and  for  no  other  purpose,  and  that  it  was  intended  to  remain 

there.     In  1822  it  was  enacted  that  no  dividends  should  be 

declared  until  the  whole  capital  was  paid  in. 


THE    SUFFOLK   BANK   SYSTEM  293 

The  currency  was  now  very  chaotic.  Country  bank  notes 
were  at  a  discount  of  i  to  5  per  cent  in  Boston,  according 
to  the  difficulty  of  sending  them  home  for  redemption.  It 
was  an  advantage  to  a  bank  to  place  itself  at  a  long  distance 
from  the  centers  of  business  and  on  the  worst  possible  road, 
to  avoid  redemption.^  Sharpers  and  speculators  seized  the 
opportunity  to  make  gains.  They  bought  or  established 
banks  for  the  purpose  of  putting  notes  in  circulation  at  long 
distances  from  their  place  of  issue,  in  order  to  postpone  the 
redemption  of  them.  They  swapped  notes  with  each  other 
for  this  purpose.  The  Boston  Exchange  Office 
MewEng?a^nd^  ^^^  incorporated  in  1804  to  facilitate  the  busi- 
ness of  swapping  bank  notes.  One  Andrew 
Dexter  bought  up  the  stock  of  the  Exchange  Office  and  used 
it  as  a  machine  for  swapping  the  notes  of  different  banks 
owned  or  controlled  by  him,  till  he  brought  ruin  upon  the 
banks,  the  community,  and  himself.  His  failure  was  one 
of  the  most  direful  events  in  the  economic  history  of  New 
England. 

The  New  England  Bank,  which  was  incorporated  in  18 13, 
gave  the  first  impulse  to  what  was  afterwards  known  as  the 
Suffolk  Bank  system,  by  publishing  an  adver- 
EneianrBank  tisement  that  it  would  receive  country  bank 
notes  and  send  them  home  for  redemption, 
charging  only  the  actual  cost.  The  average  cost  on  those 
of  Massachusetts  was  one-half  of  i  per  cent.  This  became 
the  rate  of  discount  on  such  notes  in  Boston.  On  those  of 
other  New  England  banks  it  ranged  from  i  to  5  per  cent. 

The  country  banks  discounted  commercial  paper  in  Boston, 
as  well  as  at  home,  paying  out  their  own  circulating  notes 
therefor.      As  these  notes  were  below  par  in  Boston,  but 

1  "What  New  England  did  in  the  first  decade  of  the  century  is  what 
the  middle  states  did  in  the  second  and  the  Southwest  in  the  fourth  and 
the  Ohio  states  in  the  sixth."  —  Sumner's  History  of  Bankings  p.  37. 


294  BANKING 

were  generally  accepted  by  merchants,  Gresham's  Law  came 
in  play  ;  that  is,  the  worse  money  drove  out  the  better.  The 
notes  of  the  Boston  banks  were  immediately  returned  to  them 
by  depositors,  because  they  were  received  at  par,  but  those 
of  the  country  banks  were  paid  out  by  manufacturers  and 
traders  for  wages  and  as  change,  and  thus  kept  in  circulation. 
In  the  year  1818,  when  the  Suffolk  Bank  was  chartered,  the 
Boston  banks,  seven  in  number,  having  more  than  half  of 
the  banking  capital  of  New  England,  had  only  one  twenty- 
fifth  part  of  the  circulation.  The  New  England  Bank  had 
reduced  the   cost  of  redeeming   country  bank  notes  to   a 

minimum  before  the  Suffolk  entered  the  field, 
The  Suffolk  Bank. 

but  the  cost  was  borne  by  the  note  holders. 

The  Suffolk  managers  conceived  the  idea  of  putting  the  cost 
of  redeeming  them  on  the  issuers,  and  of  abolishing  the  dis- 
count entirely.  Its  object  was  to  make  a  profit  for  itself, 
but  it  accomplished  much  more,  as  the  sequel  will  show. 
The  plan  proposed  by  the  Suffolk  was  that  it  would  redeem 
any  New  England  country  bank  notes  at  par  if  the  issuing 
banks  would  keep  a  permanent  deposit  of  $5000  in  the 
Suffolk  Bank  (the  interest  on  which  should  compensate  it 
for  doing  the  business),  plus  a  further  deposit  sufficient  to 
redeem  such  of  their  notes  as  should  reach  Boston  in  the 
course  of  trade. 

To  the  country  bankers  of  that  day  nothing  more  exas- 
perating than  this  plan  could  have  been  imagined.     They 
declined  it  because  it  seemed  likely  to  curtail 

Country  Banks  their  circulation  and  the  profits  derived  there- 
asked  to  redeem  ^  ^j^^^  ^^^  g^^^jj^  ^  ^^  ^^^^  j^  -^ 
m  Boston.                                                                          ° 

notes  systematically  and  send  them  home  for 

redemption   in   specie.      The  country  banks  were  furious. 

They  said   that   the    Suffolk  was  demanding  of  them   an 

impossibility,  —  that  of  redeeming  their  notes  in  two  places 

at  once.     The  Suffolk  had  demanded  no  such  thing.     It 


THE   SUFFOLK   BANK   SYSTEM  295 

had  merely  offered  them  the  alternative  of  redeeming  their 
notes  in  Boston  or  at  their  own  counters.  The  fight  was 
bitter.  The  Suffolk  maintained  it  at  first  single-handed. 
In  1824  the  other  Boston  banks  became  convinced  that  it 
was  time  to  put  an  end  to  the  uncurrent  money  that  was 
displacing  their  own  notes  in  the  field  of  circulation.  They 
joined. the  Suffolk  and  contributed  a  large  fund  to  enable 
the  latter  to  extend  its  operations  to  all  parts  of  New 
England.  The  run  on  the  resisting  banks  was  continued 
until  they  began  to  come  in  and  make  the  deposits 
required.     The  terms  offered  were  that  each  country  bank 

should  make  a  permanent  deposit  with  the 
PrM^s"^""^  Suffolk  of  $2000  or  upwards,  according  to  the 

amount  of  its  capital,  and  such  additional  sum 
as  might  be  necessary  to  redeem  all  of  its  notes  that  should 
come  to  Boston.  From  banks  which  complied  with  these 
conditions  the  Suffolk  offered  to  receive  at  par  the  notes  of 
any  New  England  bank  in  good  standing.  In  other  words, 
the  Suffolk  would  not  require  the  country  bank  to  remit 
drafts  on  Boston  payable  in  specie  to  make  its  balance  good, 
but  would  accept  as  specie  the  New  England  notes  which 
the  country  bank  was  habitually  receiving  in  the  course  of 
its  business.  Thus  the  Suffolk  became  a  clearing  house  for 
the  notes  of  New  England  banks  in  Boston,  balancing  them 
against  each  other  every  day.  When  the  notes  were  sorted 
and  redeemed  they  were  placed  in  packages  and  held  subject 
to  the  order  of  the  issuing  bank. 

In  1845  the  state  of  Massachusetts  passed  a  law  provid- 
ing that  no  bank  should  pay  over  its  counter  any  notes  but 
its  own,  and  this  law  remained  in  force  until  the  national 
banking  system  superseded  the  Suffolk  system.  As  no  bank 
could  pay  out  the  notes  of  any  other  bank,  it  was  compelled 
to  send  those  which  it  took  on  deposit  to  the  Suffolk  at 
once  for  redemption.     This  law  enforced  the  principle  that 


296  BANKING 

everything  paid  over  a  bank's  counter  must  be  the  equiva- 
lent of  specie.  The  whole  Suffolk  system  was  based  on  this 
principle,  and  the  battle  which  it  started  was  fought  in  order 

to  enforce  it.  A  slovenly  idea  had  pervaded  the 
Suffolk^System      whole  country  that  specie  redemption,  although 

good  in  theory,  was  bad  in  practice.  This 
conception  was  only  slowly  uprooted,  first  in  New  England, 
afterwards  in  New  York,  and  later  in  Louisiana  and  in  some 
other  spots,  but  it  held  the  ground  over  the  larger  part  of 
the  country  until  the  Civil  War.  Mr.  D.  R.  Whitney,  in  his 
history  of  the  Suffolk  Bank,  says  : 

It  was  the  underlying  principle  of  the  Suffolk  Bank  system, 
that  any  bank  issuing  circulation  should  keep  itself  at  all  times  in 
a  condition  to  be  able  to  redeem  it;  that  it  should  measure  the 
amount  by  its  ability  so  to  do ;  and  that  the  exercise  at  any  time 
of  the  right  to  demand  specie  of  a  bank  for  its  bills  was  something 
of  which  the  issuing  bank  had  no  right  to  complain. 

Nevertheless,  there  were  some  complaining  banks  all  the 
time,  though  after  the  system  had  been  fairly  established 
these  were  only  a  small  minority.  The  panic 
anVsuccess*^  of  1^37  caused  a  general  suspension  of  specie 
payments.  When  the  time  came  for  a  general 
resumption,  the  question  of  renewing  the  Suffolk  system 
was  open  to  debate.  The  banks  of  Massachusetts,  New 
Hampshire,  Vermont,  and  Connecticut  voted  at  once  to 
sustain  it,  whilst  those  of  Maine  and  Rhode  Island  came 
in  soon  afterwards.  The  Suffolk  Bank  system  gave  wide 
credit  to  the  New  England  banks,  and  in  consequence  their 
notes  gained  an  extensive  circulation  in  remote  parts  of  the 
country  and  in  Canada.  In  1857  five  hundred  banks  were 
embraced  in  the  system. 

Under  such  circumstances  the  Suffolk  took  upon  itself 
the  office  of  a  comptroller  of  the  currency.  It  did  not 
admit  a  new  bank  to  the  fellowship  of  the  system  merely 


THE   SUFFOLK  BANK   SYSTEM  297 

because  it  had  procured  a  charter,  perhaps  by  favoritism, 
perhaps  by  bribery.  It  first  satisfied  itself  that  the  share- 
holders were  men  of  good  character  and  that  the  institution 
had  been  started  in  good  faith.  Of  course,  the  Suffolk 
could  not  prevent  the  newcomer  from  issuing  notes,  but  it 
could  withhold  its  passport  and  thus  prevent  it  from  getting 
any  extensive  circulation.  The  precautions  which  it  took  in 
admitting  newcomers  were  taken  for  the  credit  and  good 
name  of  New  England  banking. 

The  Suffolk  Bank  suffered  some  losses  in  consequence 
of  advances  to  country  banks,  but  these  did  not  prevent  it 

from  declaring  dividends  at  the  average  rate 
Small  Losses.  .        ,  rr^,      ,  ,  •   , 

of  1 1^  per  cent  per  annum.      Ihe  losses  which 

it  incurred  from  counterfeits  and  alterations  in  notes  were 

very  small.     From  1836  to  1846  the  losses  by  counterfeit 

notes  were  only  $1107,  from   alterations   $766,   and  from 

counterfeit  signatures  on  genuine  notes  $82,  although  the 

redemption  at  that  time  exceeded  $100,000,000  per  year. 

In  1824  two  clerks  could  do  all  the  work.     In  1855  seventy 

were  required,  and  the  redemptions  reached  $400,000,000 

per  year.     As  the  circulation  of  the  New  England  banks  at 

that  time  was   about  $40,000,000,  the  whole  amount  was 

redeemed  ten  times  each  year,  or  about  once  in  five  weeks. 

Any  person  engaged  in  a  legitimate  trade,  in  any  part  of 

New  England,  could  exchange  his  promissory  note,  running 

sixty  or  ninety  days,  for  the  notes  of  a  bank, 
Principfe^"'^^^^     with  which  he  could   pay  the  wages  of  his 

employees  or  buy  the  materials  of  his  indus- 
try in  any  part  of  the  United  States  or  Canada.  The  notes 
would  remain  in  circulation  about  five  weeks,  and  then  find 
their  way  to  the  Suffolk  Bank,  where  they  were  offset  by  the 
notes  of  other  banks  which  took  their  rise  in  the  same  way. 
The  man  whose  promissory  note  the  bank  had  discounted, 
and  by  means  of  which  it  had  put  its  own  notes  in  circulation, 


298  BANKING 

had  meanwhile  sold  his  products.  If  he  had  sold  them  in 
Boston,  his  draft  on  the  Boston  merchant  would  pay  his 
note  at  the  local  bank,  and  this  would  enable  the  latter  to 
keep  its  balance  good  at  the  Suffolk.  If  he  had  sold  them 
in  New  York  or  Chicago,  he  would  get  his  pay  in  a  draft  on 
Boston,  which  would  answer  the  same  end.  If  he  had  sold 
them  at  home  and  had  received  New  England  bank  notes 
in  exchange  for  them,  the  local  bank  could  use  these  to 
keep  its  balance  good  at  the  Suffolk.  New  England  trade 
was  carried  on  by  an  endless  chain  of  offsets  and  book 
balances  at  the  Suffolk  Bank.  The  security  for  the  notes 
consisted  of  the  bank's  assets  and  the  banker's  moral 
character  and  business  sagacity.  Both  notes  and  deposits 
rested  upon  the  same  security  that  deposits  rest  upon  now, 
and  the  volume  of  both  was  determined  by  the  wants  of 
trade. 

The  foregoing  method  of  issuing  circulating  notes  is 
called  the  "banking  principle,"  —  a  term  used  in  contra- 
distinction to  the  "  currency  principle,"  which 
Principie^''^'^^^^  assumes  that  a  certain  amount  of  paper  cur- 
rency will  be  wanted  by  the  community  at  all 
times  and  that  the  government  may  advantageously  issue 
it,  either  directly  or  through  aft  agency  like  the  Bank  of 
England.  As  the  latter  principle  is  now  operative  in  Eng- 
land, the  average  amount  which  will  always  circulate  and 
which  the  community  will  never  send  in  for  redemption  if 
satisfied  of  its  goodness,  is  first  ascertained  experimentally. 
If,  in  the  progress  of  time,  more  notes  are  wanted  than  the 
ascertained  sum,  they  must  be  bought  with  gold.  Thus 
the  Bank  of  England  is  required  to  give  its  notes  for  all 
the  sovereigns  offered  to  it,  or  for  gold  bullion  of  equal 
value.  In  like  manner  the  Treasury  of  the  United  States 
must  issue  gold  certificates  to  all  persons  tendering  Ameri- 
can gold  coin  to  it. 


THE    SUFFOLK   BANK   SYSTEM  299 

Under  the  Suffolk  system  of  bank-note  redemption,  specie 
was  seldom   asked   for,  but  it  was   always  paid  when  de- 
manded.    The  metallic  reserve  was  the  touch- 
Specie  Reserve.  .      ,  ,     ,      ,       •  rr-n        1       , 
stone   of    the    whole   busmess.     The   banks 

learned  by  experience  how  many  notes  would  circulate  and 
how  much  specie  was  needed.  It  was  not  until  1858  that 
the  state  of  Massachusetts,  in  consequence  of  the  panic  of 
1857,  established  a  legal  reserve  of  15  per  cent  of  specie 
against  both  deposits  and  circulation.  Country  banks  might 
count  their  balances  in  Boston  banks,  payable  on  demand, 
as  specie,  for  experience  had  shown  that  notes  were  best 
redeemed  at  a  common  center,  where  the  gold  reserve 
should  be  kept.  Prior  to  the  passage  of  the  law  of  1858 
the  specie  reserve  had  been  extremely  variable,  rang- 
ing from  44  per  cent  in  1843  to  7^  per  cent  in  185 1. 
There  was  a  heated  controversy  over  the  passage  of  this 
law.  The  bankers  were  generally  opposed  to  it,  on  the 
ground  that  it  was  unnecessary  meddling,  but  public  opin- 
ion sustained  it.  After  the  passage  of  the  law  the  specie 
reserve  rose  considerably  above  the  legal  requirement  and 
afterwards  oscillated  around  it,  being  sometimes  a  little 
more,  and  sometimes  a  little  less,  than  15  per  cent.  This 
law  did  not  touch  the  other  New  England  States,  whose 
banks  were  integral  parts  of  the  Suffolk  system.  In  1859 
Maine,  Rhode  Island,  and  Connecticut  each  had  10  per 
cent  of  specie  as  against  circulation  and  deposits,  New 
Hampshire  7^  per  cent,  and  Vermont  only  6  per  cent. 

The  Suffolk  Bank  system  continued  until  it  was  super- 
seded by  the  national  banking  system,  which  required  each 
bank  to  receive  the  notes  of  every  other  bank  at  par  for  all 
dues  to  itself. 

Massachusetts  enacted  general  banking  laws  in  1805,  in 
1828,  in  1835,  ^"  i860,  and  in  1880.  Her  banking  law,  as  it 
existed  before  the  national  system  came  in  force,  consisted 


300  BANKING 

of  two  parts,  one  relating  to  chartered  banks,  and  the  othei 
to  free  banks.  A  free  banking  law,  which  allowed  persons  to 
organize  banks  at  their  own  pleasure,  on  condition  of  deposit- 
ing with  the  state  officers  bond  security  for 
Gen?rai^Lawr  ^^^^^  circulating  notes,  had  been  passed  in 
185 1,  but  only  seven  banks  were  organized 
under  it.  The  following  were  among  the  provisions  of  law 
relating  to  banks  in  i860  :  No  individual  could  hold  more 
than  one-half  the  stock  of  any  bank ;  no  person  could  be  a 
director  of  more  than  one  bank  ;  no  person  could  be  a  director 
whose  stock  was  pledged  for  debt.  Neither  the  debts  nor  the 
credits  of  a  bank  could  exceed  twice  the  capital  stock  paid 
in,  except  for  deposits  and  for  debts  to  or  from  other  banks. 
No  bank  could  pay  out  any  notes  but  its  own ;  or  issue  any 
notes,  directly  or  indirectly,  except  at  its  own  banking 
house;  or  issue  any  notes  with  the  understanding  that  they 
should  be  kept  out  a  certain  length  of  time.  No  bank  could 
make  a  loan  repayable  in  anything  except  specie  or  its  own 
notes.  In  case  of  bank  failure  the  note  holders  were  to 
have  a  prior  lien  on  the  assets.  If  any  new  banks  should  be 
chartered  with  greater  privileges  than  those  here  enumerated, 
the  same  privileges  were  to  extend  to  all  other  banks.  Three 
bank  commissioners  were  appointed  to  examine  all  banks 
once  each  year  —  or  oftener  if  they  deemed  it  expedient  — 
and  to  publish  the  results  of  such  examinations. 


RECAPITULATION 

In  the  first  quarter  of  the  nineteenth  century  the  notes 
of  country  banks  were  at  a  discount  in  all  the  commercial 
centers.  If  the  discount  was  not  excessive,  they  passed  from 
hand  to  hand  in  trade,  but  they  were  not  received  by  the 
city  banks  except  at  their  actual  value.  The  notes  of  the 
city  banks,  on  the  other  hand,  by  reason  of  their  goodness, 


THE   SUFFOLK  BANK   SYSTEM  3OI 

were  promptly  returned  to  them  as  deposits  or  in  payment 
of  loans.  Under  the  operation  of  Gresham's  Law  the  worst 
money  that  would  circulate  drove  out  the  better.  The  Boston 
banks,  although  possessing  more  than  half  the  banking 
capital  in  New  England,  had  only  one  twenty- fifth  part  of 
the  circulation.  Country  bank  notes  accumulated  in  the 
hands  of  merchants,  and  th^y  either  sold  them  to  brokers  or 
sent  them  by  messengers  to  the  issuing  banks  for  redemp- 
tion. The  discount  in  Boston  on  the  notes  of  Massachu- 
setts country  banks  averaged  J  per  cent.  On  those  of  the 
other  New  England  States  it  ranged  from  i  to  5  per  cent 
according  to  the  distance  of  the  banks  and  the  cost  of 
securing  redemption. 

The  Suffolk  Bank  of  Boston  was  chartered  in  18 18  as  an 
ordinary  bank  of  issue  and  deposit.  Its  managers  con- 
ceived the  idea  of  making  a  profit  out  of  the  redemption  of 
country  bank  notes.  They  offered  to  redeem  all  such  notes 
at  par,  if  the  issuing  banks  would  provide  funds  for  that 
purpose  and  would  also  make  permanent  deposits  in  the 
Suffolk  Bank,  the  use  of  which  should  compensate  it  for  its 
trouble.  At  first  only  a  few  of  the  country  banks  acceded 
to  this  proposal.  The  Suffolk  Bank  then  sent  home  for 
redemption  all  the  notes  of  the  non-assenting  banks  that  it 
could  get.  The  other  Boston  banks  joined  the  Suffolk  and 
contributed  a  fund  for  carrying  on  the  campaign  in  all  the 
New  England  States.  Eventually  all  the  country  banks  were 
forced  into  the  arrangement,  because  it  was  found  to  be 
cheaper  to  redeem  their  notes  in  Boston  than  at  home. 
They  found  also  that  under  the  Suffolk  system  their  credit 
was  so  much  improved  that  their  notes  gained  circulation  in 
all  parts  of  the  United  States  and  Canada.  The  system  was, 
in  fact,  advantageous  to  them  as  well  as  to  the  public. 

When  the  system  had  been  thoroughly  established,  the 
Suffolk  Bank  accepted  the  notes  of  all  solvent  New  England 


302  BANKING 

banks  at  par  and  offset  them  against  each  other,  thus  serving 
as  a  clearing  house  for  New  England  bank-note  issues. 
The  legislature  of  Massachusetts  testified  its  approval  of 
the  system  by  passing  a  law  prohibiting  banks  from  paying 
out  any  notes  but  their  own,  thus  making  it  necessary  to 
send  to  the  Suffolk  for  prompt  redemption  the  notes  of 
other  banks  which  came  into  their  hands. 

The  redemptions,  or  clearings,  at  the  Suffolk  Bank  reached 
the  sum  of  $400,000,000  per  year.  As  the  total  circulation 
of  New  England  banks  at  that  time  was  only  $40,000,000,  it 
followed  that  the  notes  were  redeemed,  on  the  average,  ten 
times  each  year.  The  Suffolk  system  continued  until  1865, 
when  it  was  superseded  by  the  national  banking  system. 
It  brought  banking  in  New  England  to  a  state  of  responsi- 
bility, order,  and  solvency  unknown  before. 

Authorities 

Whitney's  History  of  the  Suffolk  Bank. 
Stetson's  History  of  the  State  Bank. 

Root's  New  England  Bank  Currency  ("  Sound  Currency " 
series). 

Knox's  History  of  Baftking  in  the  United  States. 
Reports  of  Bank  Commissioners  of  Massachusetts. 


CHAPTER    X 
THE   SAFETY  FUND   SYSTEM 

New  York  has  made  two  contributions  of  the  first  impor- 
tance to  banking  science  :  (i)  the  safety  fund  system,  or 
mutual  insurance  of  circulating  notes  ;  (2)  the  free  bank, 
or  bond  deposit,  system  for  securing  circulating  notes,  which 
was  the  precursor  of  the  national  banking  system. 

During  the  first  half  century  banking  in  New  York  was 
an  integral  part  of  the  spoils  of  politics.  Federalists  would 
grant  no  charters  to  Republicans,  and  Republicans  none  to 
Federalists.  After  a  few  banks  had  been  established  they 
united,  regardless  of  politics,  to  create  a  monopoly  by  pre- 
venting other  persons  from  getting  charters. 
PoUticr.^^  When  charters  were  applied  for  and  refused, 

the  applicants  began  business  on  the  common- 
law  plan.  Then,  at  the  instigation  of  the  favored  ones,  the 
politicians  passed  a  law  to  suppress  all  unchartered  banks. 
The  latter  went  to  Albany  and  bribed  the  legislature.  In 
short,  politics,  monopoly,  and  bribery  constitute  the  key  to 
banking  in  the  early  history  of  the  state. 

The  Bank  of  New  York,  described  in  a  previous  chapter,^ 
was  controlled  by  Federalists.  As  the  an  ti- Federalists  knew 
that  the  legislature  would  not  grant  a  charter  to  them, 
Aaron  Burr  conceived  the  idea  of  procuring  one  by  stealth. 
The  city  had  recently  been  scourged  with  yellow  fever,  the 
ravages  of  which  were  attributed  in  part  to  the  bad  water. 
Accordingly  a  petition  was  presented  for  a  charter  for  a 
^  See  page  248. 
303 


304  BANKING 

company  with  a  capital  of  $2,000,000  to  supply  New  York 
City  with  pure  water.  In  it  was  a  clause  authorizing  the 
company  to  use  any  surplus  of  capital,  over  and  above  the 
amount  needed  for  the  water  works,  in  any 
Compan"  ^  ^"  moneyed  transactions  not  inconsistent  with 
the  constitution  and  laws  of  the  state  or  of  the 
United  States.  The  Council  of  Revision  (of  which  John  Jay 
was  president),  whose  approval  was  necessary,  did  not  suspect 
that  banking  powers  were  concealed  in  the  charter.  The 
charter  was  granted,  and  the  company  applied  one  half  of  its 
capital  to  water  works  and  the  other  half  to  the  banking 
business.  This  was  the  Manhattan  Company,  which  ceased 
to  be  a  water  company  in  1840,  but  has  continued  as  a  bank 
to  the  present  day. 

When  the  Republicans  came  into  power  they  refused  all 
applications  for  bank  charters  to  Federalists  ;  and  the  existing 
banks,  of  which  there  were  six  in  the  state  prior  to  1804, 
made  common  cause  to  prevent  any  new  ones  from  entering 
the  field.  In  that  year  the  Merchants'  Bank  of  New  York 
City,  which  was  already  in  operation  under  the  common 
law,  applied  for  a  charter.  It  was  refused.  The  bank 
bought  its  way  through  the  legislature  amid  scenes  of  excite- 
ment, which  included  fist  fighting  in  open  session.  In  181 1 
the  Bank  of  America  repeated  the  operation  on  a  larger 
scale.  In  182 1  the  people  of  the  state  sought  to  put  an 
end  to  these  scandals  by  a  clause  in  the  constitution  of  that 
year  requiring  a  two-thirds  vote  of  both  branches  of  the 
legislature  to  pass  a  bank  charter,  but  the  only  effect  was 
"  to  increase  the  evil  by  rendering  necessary  a  more  extended 
system  of  corruption."  ^ 

In  1828  forty  bank  charters  were  in  force,  out  of  forty- 
three  which  had  been  granted,  three  small  country  banks 
having  become  insolvent.     The   charters  of   thirty  of   the 

1  Hammond's  History  of  Political  Parties  in  the  State  of  New  York. 


THE   SAFETY   FUND    SYSTEM  305 

survivors  were  about  to  expire,  and  all  efforts  to  renew  them 

had  failed  to  secure  the  necessary  two-thirds  vote.      The 

legislature  was  determined  to  impose  on  the  banks  some 

new  conditions,  in  the  public   interest.      At 
Joshua  Forman.        ,  .      .  ,-r  o      n    n*-       t      1 

this  juncture  (January  24,  1829)  Mr.  Joshua 

Forman  of  Syracuse  addressed  a  letter  to  Martin  Van 
Buren,  governor  of  the  state,  proposing  a  plan  for  the 
mutual- insurance  of  banks.  His  suggestion  was  that  each 
bank  should  be  required  to  contribute  annually  to  a  common 
fund  for  the  payment  of  the  debts  of  such  banks  as  should 
fail,  this  contribution  to  continue  till  it  should  reach  half  a 
million  dollars  and  be  kept  up  to  that  sum  by  further  con- 
tributions when  needful. 

Mr.  Forman's  plan  was  adopted,  and  a  law  was  passed 
providing  that  every  bank  whose  charter  should  be  granted 
or  extended  thereafter  should  pay  into  a  "  bank  fund " 
one-half  of  i  per  cent  of  its  capital  each  year, 
system  ^^  until  the  contributions  should  be  equal  to 
3  per  cent  of  its  capital  stock.  This  fund 
was  to  be  applied  solely  to  the  payment  of  the  debts  (exclu- 
sive of  the  capital  stock)  of  failed  banks  belonging  to  the 
system.  The  fund  was  not  to  be  used,  however,  until  the 
assets  of  the  failed  bank  had  been  exhausted  and  the  defi- 
ciency determined  by  judicial  proceedings.  Whenever  the 
fund  should  be  reduced  in  this  way,  the  comptroller  was  to 
call  on  the  banks  for  fresh  contributions,  at  the  same  rate, 
as  to  time  and  amount,  as  the  original  ones.  The  same  act 
provided  for  the  appointment  of  three  commissioners  to 
examine  all  the  banks  three  times  each  year,  or  oftener  if 
required  to  do  so.  Any  three  banks  might  call  for  a  special 
examination  of  any  bank  in  the  system. 

In  1837  three  safety  fund  banks,  all  in  the  city  of  Buffalo, 
were  reported  to  be  in  difficulties.  The  legislature  passed  a 
law  authorizing  the  comptroller  to  make  immediate  payment, 


306  BANKING 

out  of  the  bank  fund,  of  the  notes  of  any  insolvent  bank 
whose  liabilities,  in  excess  of  assets,  should  not  exceed 
two-thirds  of  the  amount  in  the  bank  fund.  This  law  was 
applied  to  the  three  Buffalo  banks.  There  was  no  deprecia- 
tion of  their  notes,  and  the  bank  fund  was  restored  out 
of  the  assets  of  the  failed  banks.  Two  other  banks  went 
into  liquidation  soon  afterwards,  and  their  notes  were  paid 
and  the  fund  replenished  in  the  same  way.  There  were  no 
more  failures  till  1840.  During  that  and  the  two  following 
years  eleven  banks  failed.  The  fund  was  now  about  $900,000, 
of  which  $600,000  was  applicable,  under  the  law  of  1837, 
to  the  immediate  redemption  of  circulating 
Prio^Lien.^  ^  notes,  the  remainder  being  reserved  for  deposi- 
tors. The  first  three  banks  in  the  order  of 
failure  exhausted  this  sum.  The  bank  commissioners, 
in  their  annual  report  for  1841,  said  that  the  bank  fund 
was  primarily  intended  for  the  protection  of  note  holders, 
not  depositors  or  general  creditors.  The  fact  that  the  law 
put  all  creditors  on  the  same  level  was  not  understood  by 
the  public  or  by  the  bankers  themselves,  and  its  expediency 
was  called  in  question.  In  1842  the  law  was  amended,  so 
that  after  the  payment  of  all  the  liabilities  charged  against 
the  fund  at  that  time  the  note  holders  should  have  the  first 
lien  on  it. 

In  the  constitution  of  1846  note  holders  were  made  pre- 
ferred creditors  of  all  failed  banks.  This  valuable  principle 
had  been   adopted  by  the   state  of    Connecticut  in    1831. 

The    law    of   that   state,    however,   gave    the 
Reason  for  this.  .  •  ,      ,     ,  ,  r  r    ^ 

preference  only  to  the  holders  of  notes  of  the 

denomination  of  $100  or  less.     One  reason  why  note  holders 

ought    to   be    preferred   creditors   of  failed    banks    is    that 

usually  it  is  not  a  matter  of  choice  whether  persons  shall 

or  shall  not  accept  bank  notes  offered  in  payment.     This  is 

especially  true  of  the  poorer  and  more  helpless  classes  of 


THE    SAFETY   FUND   SYSTEM  3O7 

the  community,  who  are  liable  to  lose  situations,  or  favor, 
or  patronage,  if  they  make  objections  to  the  kind  of  money 
offered  to  them,  and  who  are  less  able  to  form  opinions  for 
themselves  on  the  soundness  and  standing  of  particular 
banks. 

Unfortunately  the  charges  against  the  bank  fund  before 
the  act  of  1842  took  effect  were  sufficient  to  absorb 
everything  it  was  likely  to  receive  from  the  ^  per  cent 
annual  contribution  for  several  years.  Accordingly  the 
state  issued  its  own  stock  for  $900,000  to 
■^sues'^^^^*  ^^^^"  ^^^^  prompt  payment  to  the  creditors  of  the 
failed  banks,  taking  a  lien  on  the  fund  for 
repayment;  and  eventually  the  state's  advances  were  all 
reimbursed  out  of  the  fund,  principal  and  interest.  More- 
over, the  fund  redeemed  about  $700,000  of  notes  fraudu- 
lently overissued,  —  a  consequence  of  the  lack,  in  the  origi- 
nal act,  of  any  system  of  public  registration.  The  whole 
amount  of  payments  into  the  safety  fund  was  $3,104,999. 

The  faults  of  the  safety  fund  system  were  errors  of 
detail.  The  fund  should  have  been  liable  only  for  circulat- 
ing notes.  By  attempting  too  much,  the  system  broke  down. 
When  a  bank  failed  the  redemption  of  its  notes  from  the 
fund  should  have  been  immediate,  so  that  the  note  holders 
should  not  lose  by  delay  and  depreciation,  and  the  fund 
should  have  been  reimbursed  later  out  of  the  assets  of  the 
failed  banks  and  the  legal  contributions  of  the  solvent  ones. 
On  the  assumption  that  the  circulation  only  ought  to  be 
protected,  the  contributions  to  the  fund  should 
the^System  have  been  proportioned  to  the  circulation,  and 

not  to  the  capital  stock,  of  each  bank.  The 
notes  should  have  been  issued  to  the  banks  only  by  the  state 
comptroller,  and  duly  recorded.  In  his  report  for  1848, 
Millard  Fillmore,  the  comptroller,  said  that  "the  Safety 
Fund  would  have  proved  an  ample  indemnity  to  the  bill 


308  BANKING 

holder  had  it  not  been  applied  to  the  payment  of  other 
debts  of  the  banks  than  those  due  for  circulation."  ^ 

Although  the  safety  fund  system  has  passed  away  in  the 
place  of  its  birth,  it  is  alive  and  in  high  esteem  in  a  neigh- 
boring country.  It  was  adopted  in  Canada  in  1890,  in  order 
to  secure  the  prompt  redemption  of  the  notes  of  failed  banks, 
i.e.,  to  avoid  a  discount  on  the  notes  of  such  banks  pending 
liquidation.  Under  the  Canadian  system  the  circulating 
notes  are  the  first  lien  on  the  assets,  and  it  is  believed  that 
the  assets  will  always  suffice  to  redeem  the  notes ;  but  the 
delay  in  converting  them  into  cash,  prior  to  the  establish- 
ment of  the  safety  fund,  had  led  to  a  temporary  discount 
on   such  notes.     The  maximum  amount  of  the  fund  is  5 

per  cent  of  the  outstanding  circulation  of  all 
fn^calfad?^''''^    the  Canadian  banks,  and  it  must  be  kept  up  to 

this  maximum,  the  Minister  of  Finance  having 
power  to  call  on  the  banks  for  additional  contributions,  when 
necessary,  not  exceeding  i  per  cent  in  any  year.  When  the 
assets  of  failed  banks  are  paid  in,  however,  refunds  may  be 
made  to  the  contributing  banks  of  the  excess  over  5  per  cent. 
Under  the  Canadian  law  the  notes  of  failed  banks  draw 
interest  at  6  per  cent  until  redeemed.  They  are  therefore 
eagerly  received  by  the  other  banks,  and  there  has  been 
no  depreciation  on  any  such  notes  since  the  system  was 
adopted. 

1  Mr.  L.  Carroll  Root  {Sound  Currency^  Vol.  II,  No.  5)  has  verified 
Mr.  Fillmore's  statement  by  an  independent  examination  of  the  figures. 
"  It  is  plain,"  he  says,  "  as  a  result  of  calculation  from  experiments  of 
36  years  (1829-1865),  that,  had  the  Safety  Fund  system  —  as  perfected 
prior  to  and  in  the  constitution  of  1846  —  been  left  untouched  as  that 
upon  which  New  York  State  bank  currency  was  based,  not  merely 
would  every  dollar  of  circulation  have  been  kept  good,  but  the  total 
assessment  to  keep  the  fund  good  would  have  averaged  less  than  \  per 
cent  on  the  banking  capital,  or  about  f  per  cent  on  the  average  circu- 
lation outstanding." 


THE    SAFETY    FUND    SYSTEM  309 

RECAPITULATION 

The  safety  fund  system  of  New  York  was  a  mutual 
insurance  of  banks,  established  by  law  in  the  year  1829,  for 
the  protection  of  their  creditors.  It  required  an  annual 
contribution  by  all  the  banks  in  the  state  of  a  sum  equal 
to  ^  per  cent  of  their  capital,  until  the  fund  should  reach 
3  per  cent  thereof,  out  of  which  the  remaining  indebtedness 
of  insolvent  banks  was  to  be  paid  after  their  assets  were 
exhausted,  —  the  contributions  to  be  renewed  from  time  to 
time  at  the  same  rate  when  necessary.  The  first  bank  failures 
that  took  place  after  the  system  was  adopted  occurred  in 
1837.  A  law  was  then  passed  by  the  legislature  authorizing 
the  immediate  use  of  the  money  in  the  fund  for  the  redemp- 
tion of  the  notes  of  failed  banks,  provided  the  amount  called 
for  did  not  exceed  two-thirds  of  the  whole  fund  then  in 
hand.  The  notes  of  the  failed  banks  were  redeemed  imme- 
diately, and  they  suffered  no  depreciation.  In  1840-42 
eleven  banks  failed,  and  the  consequent  demands  to  meet 
the  claims  of  both  note  holders  and  depositors  were  too 
large  to  be  satisfied  out  of  the  money  in  the  fund.  In  1842 
a  law  was  enacted  that,  after  the  existing  claims  were  paid, 
the  fund  should  be  applied  only  to  the  redemption  of  the 
circulating  notes  of  failed  banks.  This  change  came  too 
late  to  be  of  service ;  for  the  claims  on  the  fund  were  larger 
than  could  be  met  out  of  the  annual  contributions  for  several 
years.  In  the  meantime  the  policy  of  the  state  in  reference 
to  banks  was  radically  changed  by  the  constitution  of  1846, 
which  prohibited  the  granting  or  extension  of  any  special 
charters  for  banks.  As  all  of  the  safety  fund  banks  were 
in  this  category,  the  system  was  doomed  to  extinction  when 
the  existing  charters  expired.  All  the  claims  against  the 
fund  were  eventually  paid  in  full,  including  the  redemption 
of   a   large    amount   of   notes  fraudulently  issued,  and  an 


3IO  BANKING 

unclaimed  balance  of  $13,144  was  turned  into  the  state 
treasury.  The  last  charters  of  safety  fund  banks  expired 
in  1866. 

Experience  under  the  safety  fund  system  showed  that 
the  original  act  was  defective  in  the  following  particulars : 
(i)  it  should  have  required  public  registration  of  note  issues 
to  prevent  fraud ;  (2)  note  holders  should  have  been  made 
preferred  creditors  of  failed  banks  ;  (3)  the  safety  fund 
should  have  been  applied  only  to  the  redemption  of  circu- 
lating notes  ;  (4)  the  fund  should  have  been  applied  to  this 
purpose  immediately  upon  the  failure  of  any  bank  (to  prevent 
depreciation  of  its  notes),  instead  of  awaiting  the  results  of 
liquidation  of  its  affairs.  All  of  these  changes  were  made 
by  amendments  to  the  law  or  the  constitution  of  the  state 
between  the  years  1837  and  1846.  If  they  had  been 
embodied  in  the  original  act,  there  would  never  have  been 
any  loss  to  note  holders  under  the  system,  by  depreciation 
or  otherwise. 


CHAPTER   XI 

THE  FREE  BANK  SYSTEM 

The  next  change  in  the  banking  system  of  New  York 
was  even  more  radical  than  the  one  described  in  the  pre- 
ceding chapter.  Until  1838  banking  had 
System°°^°^  remained  a  monopoly.  Nobody  could  get  a 
charter  without  a  special  act  of  the  legis- 
lature, and  nobody  could  invest  even  $100  in  a  new  bank 
without  the  consent  of  the  bank  commissioners  of  the 
state.  When  a  charter  was  granted  these  officials  parceled 
out,  as  a  matter  of  favoritism  and  partisan  spoils,  the  rights 
to  subscribe  for  shares.  Contention  and  heart  burning 
were  the  necessary  consequence,  and  no  persons  were  more 
keenly  alive  to  the  disgrace  than  the  bank  commissioners 
themselves,  who  said  in  their  report  of  1837  : 

The  distribution  of  bank  stocks  created  at  the  last  session  has 
in  very  few,  if  any,  instances  been  productive  of  anything  like 
general  satisfaction.  In  most  instances  its  fruits  have  been  vio- 
lent contention  and  bitter  personal  animosities,  corrupting  to 
the  public  mind  and  destructive  of  the  peace  and  harmony  of 
society. 

These  scandals  caused  nearly  universal  disgust  and  led 
to  a  revolt  in  the  Democratic  party  in  1835.  A  faction 
sprang  up  calling  themselves  the  Equal  Rights  party,  known 
afterwards  as  the  "  Locofocos."  They  adopted  a  platform 
in  which  they  declared  "  hostility  to  any  and  all  monopolies 
by  legislation,  because  they  are  violations  of  the  equal  rights 
of  the  people."     As  the  Democratic  party  took  no  steps  to 

311 


312  BANKING 

reform  the  evils  complained  of,  the  Locofocos  joined  the 

Whigs  and  carried  the  elections  in  the  city  of  New  York  in 

the  autumn  of  1836  and  the  spring  of  1837,  ^s  well  as  the 

state  election  in  the  autumn  of  the  latter  year,  securing  a 

large  majority  of  the  legislature.  This  victory 
Political  Revolt.     ,f       ,ri        1.        ,  r^o,  • 

led  to  the  free  banking  law  of  1838,  the  motive 

for  it  being  political  rather  than  financial.  A  suggestion 
for  such  a  system  had  been  made  eleven  years  earlier  by 
the  Rev.  John  McVickar,  professor  of  political  economy  in 
Columbia  College,  in  a  letter  written  to  a  gentleman  in 
Albany  and  published  in  a  pamphlet.  Professor  McVickar 
proposed  that  any  individuals  or  associations  might  enter 
into  the  banking  business  freely,  but  that  nine-tenths  of  their 
capital  should  be  invested  in  government  stock,  of  which 
the  bank  should  receive  the  interest,  though  the  principal 
should  remain  in  the  custody  of  the  state  as  security  for 
the  circulating  notes  of  the  bank.  The  remaining  tenth  of 
the  capital  might,  however,  be  invested  as  the  officers  of  the 
bank  should  see  fit. 

The  free  banking  law  of  New  York  was  introduced  in 
the  legislature  by  Mr.  Abijah  Mann.  As  amended  and 
passed,  it  provided  that  any  person,  or  association  of  per- 
sons, might  receive  from  the  comptroller  circulating  notes, 
and  after  signing  them  might  issue  them  as  money  by  first 
depositing  with  him  stocks  of  the  United 
Free  Banking        g^^^^^^  ^^  ^^^  ^^^^^  ^^  ^^^  York,  or  of  any 

other  state  approved  by  the  comptroller,  made 
equal  to  a  5  per  cent  stock  of  the  state  of  New  York,  or 
bonds  and  mortgages  on  improved,  productive,  and  unincum- 
bered real  estate,  worth  double  the  amount  of  the  mortgage, 
exclusive  of  the  buildings  thereon,  and  bearing  interest  at 
not  less  than  6  per  cent  per  annum.  The  banks  might 
deposit  stocks  only,  or  half  stocks  and  half  bonds  and 
mortgages,  and  the  printed  notes  should  specify  to  which 


THE    FREE    BANK    SYSTEM  313 

class  they  belonged.  In  case  default  should  be  made  in 
the  redemption  of  any  such  notes,  the  comptroller  was  to 
sell  the  securities  and  apply  the  proceeds  to  the  redemption 
of  the  notes.  The  state  was  not  in  any  way  responsible 
for  the  payment  of  the  notes  beyond  the  proper  appli- 
cation of  the  securities  to  that  purpose.  The  persons  or 
associations  depositing  the  securities  were  to  receive  the 
interest  on  them  as  long  as  they  redeemed  their  notes  on 
demand,  unless  in  the  opinion  of  the  comptroller  they  had 
depreciated  so  as  to  be  no  longer  adequate  security. 

The  bill  became  a  law  on  April  18,  1838.  There  was  an 
immediate  rush  of  people  into  the  banking  business.  One 
hundred  and  thirty-three  new  banks  were  organized,  and 
seventy-six  started  in  business  before  December  i,  1839. 
Experience  under  the  new  system  was  at  first  disastrous. 

The  Bank  of  Tonawanda  failed  in  1840,  and 
A  Bad  Beginning.  .  .  .  ,•       ,        ,        .  •    , 

its  securities  reahzed  only  sixty-eight  cents  on 

the  dollar  of  its  outstanding  notes.  This  example  led  to  a 
change  of  the  law  regarding  stock  securities,  which  were 
now  restricted,  as  to  banks  subsequently  established,  to 
those  of  New  York.  The  mortality  of  the  free  banks  was 
so  great,  by  failure  or  voluntary  liquidation,  that  in  1842 
only  forty-six  remained  in  operation.  In  1844  the  comp- 
troller reported  that  twenty-six  free  banks  had  failed,  and 
that  their  circulation  has  been  redeemed  at  the  average  rate 
of  seventy-six  cents  on  the  dollar. 

The  practice  of  issuing  notes  at  interior  towns  by  indi- 
viduals residing  in  New  York  City,  or  even  in  other  states, 
was  soon  discovered  to  be  prevalent.  Hence,  a  law  was 
passed  in  1840  requiring  that  all  country  banks  should 
redeem  their  notes  in  New  York  City  or  Albany  at  a  dis- 
count not  exceeding  one-half  of  i  per  cent.  As  they  usually 
passed  at  par,  a  man  could  issue  and  lend  notes  in  New 
York  City,  dating  them  at  some  remote  place  in  the  interior, 


314  BANKING 

and  then  redeem  them  at  a  discount  of  ^  per  cent  at  the 
very  place  where  he  had  issued  them.  The  profit  on  $10,000 
would   be   $50   each   time  that  amount  of   notes   was   put 

out  and  taken  back,  plus  the  interest  paid 
BanSne^  ^^^^       ^^  ^^^  borrower.     This  was  more  freedom  in 

banking  than  had  been  contemplated.  An 
act  was  accordingly  passed  in  1844,  providing  that  nobody 
should  transact  business  as  a  banker  except  at  the  place  of 
his  actual  residence,  but  this  law  was  evaded.  The  banker 
appointed  a  dummy  in  the  interior  town  to  sign  the  notes 
for  him,  and  then  went  on  as  before.  Banks  established 
merely  for  the  purpose  of  issuing  notes  were  made  the  sub- 
ject of  examination  and  reproof  by  a  committee  of  the  senate 
in  1845.  Three  years  later  a  law  was  passed  requiring  that 
all  banking  associations  and  individual  bankers  should  be 
banks  of  deposit  and  discount  as  well  as  of  circulation  ;  but, 
as  there  was  no  means  provided  for  enforcing  it,  this  law 
was  evaded  also.  In  185 1  the  legal  discount  on  country 
bank  notes  was  reduced  to  ^  per  cent. 

It  was  commonly  supposed  that  security  for  bank  notes 
was  the  same  thing  as  redemption  of  them ;  and  that,  if  the 
notes  were  secured,  redemption  would  not  be  demanded, 
or  if  demanded  would  be  easily  met.  All  of  these  supposi- 
tions were  erroneous.  Redemption  of  the  notes  was  just  as 
necessary  under  this  system  as  under  any  other ;  and  when 
the  test  came,  the  security  was  found  to  be  defective.  The 
event  proved  that  there  were  other  conditions  requisite  to  a 
good  banking  system,  —  that  the  shareholders  must  be  men 
of  substance  and  character,  that  the  banks  must  have  capital 
and  local  habitations,  and  that  they  must  do  a  real  banking 
business.  The  defects  of  the  securities  under  the  free 
bank  system  were  remediable,  however.  Experience  having 
proved  that  bonds  and  mortgages  were  not  quick  assets 
?^nd  that  they  might  become  utterly  unavailable  in  a  panic, 


THE   FREE   BANK   SYSTEM  315 

they  were  finally  cast  out  altogether,  and  the  stock  securi- 
ties were  toned  up  to  par  by  being  restricted  to  those  of  the 
United  States  and  of  the  state  of  New  York.  The  state 
constitution  of  1846  also  contained  important 
the^System  provisions.     It    made   stockholders    individu- 

ally liable  (after  a  specified  date)  for  the 
debts  of  banks  to  an  amount  equal  to  their  respective 
shares,  in  addition  to  the  amount  invested  by  them  in  the 
bank.  It  provided  that  in  case  of  insolvency  note  holders 
should  be  preferred  creditors  ;  that  the  legislature  should 
not  pass  any  law  sanctioning  the  suspension  of  specie  pay- 
ments ;  that  no  special  charters  for  banking  purposes  should 
be  thereafter  granted  or  extended ;  and  that  all  future  acts  of 
incorporation,  whether  general  or  special,  might  be  altered, 
amended,  or  repealed.  All  these  provisions  are  traceable 
to  the  Locofoco  uprising  of  1836-37. 

From  1839  ^o  1850  thirty-two  free  banks  failed,  with  a 
circulation  of   $1,468,243,  which  was  redeemed  at  various 

rates  from  par  down  to  thirty  cents  on  the  dol- 
Sy stem  perfected.  ,         ,  ,         ■,     .      \^  „  ^ 

lar,  the  aggregate  loss  being  $325,487.     From 

185 1  to  1861  there  were  twenty-five  failures,  with  a  cir- 
culation of  $1,648,000  and  a  loss  of  only  $72,849.  After 
1 86 1  there  were  no  failures  that  resulted  in  loss  to  note 
holders,  except  by  some  small  delay  in  realizing  on  the 
securities.  The  system  was  now  nearly  perfect,  so  far  as 
security  was  concerned. 

Comparison  of  the  results  of  the  safety  fund  and  of  the 
free  bank  systems  in  the  state  of  New  York  shows  a  marked 
advantage  for  the  former  in  the  matter  of  elasticity  of 
note  issues,  or  the  power  to  respond  quickly  to  the  vary- 
ing demands  of  business.  It  was  not  necessary  for  the 
safety  fund  banks  to  invest  additional  capital,  to  buy 
securities  in  the  market  and  lodge  them  with  the  state 
comptroller,  and   to  go  through  other  tedious   formalities 


3l6  BANKING 

before  meeting  the  demand  for  more  notes.  They  could 
respond  immediately,  and  in  exact  measure  with  the  demand. 
The  free  banks,  after  buying  their  notes  from  the  state  comp- 
troller, could  not  put  out  any  more  of  them 
N^fissues!  than  the  safety  fund  banks  could  of  theirs, 
which  cost  nothing,  or  keep  them  out  any 
longer.  When  the  notes  of  the  free  banks  came  back  to 
their  counters  they  became  dead  capital,  earning  no  interest. 
Hence  those  banks  would  take  out  no  more  than  the  aver- 
age amount  which  they  could  keep  in  circulation.  Thus 
they  would  have  no  margin  for  special  emergencies. 
Accordingly  there  was  a  regular  rise  and  fall  of  the  circu- 
lation of  the  safety  fund  banks  according  to  the  seasons 
and  the  state  of  trade,  while  that  of  the  free  banks  was 
comparatively  rigid. ^ 

The  free  bank  system  of  New  York  harmonized  so  well 
with  the  doctrine  of  equal  rights  and  gave  such  promise  of 
abundance  of  money  that  it  became  very  popular.  Sixteen 
states  adopted  it  in  whole  or  in  part.  The  controlling  motive 
in  most  cases  was  to  secure  circulating  notes  in  the  largest 
amount  and  with  the  greatest  rapidity  possible.  The  state 
of  Illinois  passed  her  free  banking  law  in  185 1.  In  Novem- 
ber of  that  year  it  was  submitted  to  a  vote  of 
S^iiii^oL^^  the  people  and  ratified.     It  provided  that  any 

number  of  persons  might  organize  a  bank,  but 
that  no  bank  should  have  a  less  capital  than  $50,000.  It 
did  not  require  that  a  bank  should  have  any  directors.  The 
bank's  capital  might  consist  wholly  of  bonds  of  states  or  the 
United  States,  deposited  with  the  state  auditor  as  security 
for  its  circulating  notes.     The  auditor  could  deliver  to  the 

1  Mr.  L.  Carroll  Root,  in  his  monograph  on  New  York  Bank  Cur- 
rency, presents  a  view  of  the  working  of  the  two  systems  as  regards 
elasticity,  by  charts  showing  the  rise  and  fall  of  the  circulation  undei 
each  from  1857  to  1861.  —  Sound  Currency,  Vol.  II,  No.  5. 


THE   FREE    BANK   SYSTEM  317 

bank  in  circulating  notes  80  per  cent  of  the  market  value  of 
the  securities.  The  banks  were  allowed  to  pay  out  the  notes 
of  any  specie-paying  banks  of  the  United  States  or  of 
Canada.  This  was  virtually  an  authorization  to  banks  to 
pay  their  debts  in  something  else  than  gold  or  silver  and 
hence  was  unconstitutional ;  but,  as  it  was  in  accord  with 
public  opinion,  nobody  questioned  it.  One  hundred  and 
twenty  banks  were  established  under  this  law.  Most  of  them 
were  banks  of  circulation  only.  The  banking  business,  in 
their  view,  consisted  in  converting  state  bonds  into  circulat- 
ing notes,  getting  these  into  the  hands  of  the  people  for 
value,  and  preventing  note  holders  from  calling  on  them  for 
specie.  There  were  attempts  at  first  to  do  a  legitimate 
banking  business  in  the  large  towns  under  this  law  ;  but  they 
were  ineffectual,  because  the  notes  of  such  banks  would  be 
returned  for  redemption,  while  those  of  remote  and  inacces- 
sible places  would  remain  in  circulation.  In  practice  it  was 
hardly  necessary  for  the  bank  to  have  a  place  of  business,  if 
its  notes  were  secured.  In  some  instances,  where  attempts 
were  made  in  Illinois  to  present  notes  for  redemption  at  the 
bank's  counter,  no  counter  was  found,  but  merely  a  hired 
room  in  some  place  remote  from  any  railway  station  and 
situated  on  some  bottomless  prairie  road. 

The  panic  of  1857  caused  a  suspension  of  specie  pay- 
ments over  the  greater  part  of  the  country,  including  New 
York  and  New  England.  With  such  illustrious  examples 
before  them,  the  closing  of  the  banks  of  Illinois  was  looked 
upon  as  a  matter  of  course.  Exchange  on  New  York  rose  to 
15  per  cent  premium  in  Chicago.  The  country  banks  of  Illi- 
nois had  nothing  except  security  bonds  which  were  held  by 
the  state  auditor.  In  many  cases  the  bonds  had  been  bor- 
rowed and  the  resulting  notes  had  been  handed  over  to  the 
lenders.  Nevertheless,  the  people  were  tolerant  and  allowed 
the  bankers  time  to  recuperate.    In  186 1,  when  the  Civil  War 


3l8  BANKING 

began,  there  were  112  so-called  "solvent  banks"  in  exist- 
ence in  the  state,  meaning  those  that  had  recovered  from 
the  disasters  of  1857  or  had  been  established  later.  When 
the  clouds  of  the  war  began  to  lower,  the  security  bonds, 
many  of  which  were  those  of  Southern  states,  began  to 
decline  in  value,  and  the  notes  depreciated  accordingly. 
There  was  now  no  real  money  and  no  currency  in  Illinois, 
but  merely  different  vaHeties  of  uncurrent  notes  passing 
at  various  rates  of  discount,  the  quotations  varying  from 
day  to  day,  from  place  to  place,  and  even  from  street  to 
street.  Lists  of  banks,  with  the  rates  at  which  their  notes 
would  be  received  in  trade,  were  posted  in  all  shops,  railroad 

offices,  and  brokers'  offices,  and  published  in 
Final  Collapse. 

the  newspapers.    There  was  a  merchants'  list, 

a  bankers'  list,  and  a  railroad  list,  and  these  were  subject 
to  change  without  notice.  In  August,  1861,  the  system  col- 
lapsed. At  the  end  of  the  year  only  seven  free  banks 
remained,  with  a  total  circulation  of  $147,000.  The  legisla- 
ture was  bewildered  by  the  crumbling  of  the  system  on  whose 
security  such  extravagant  hopes  had  been  built.  A  law  was 
enacted  providing  that  no  bank  should  have  a  circulation 
exceeding  three  times  its  capital,  and  that  the  bonds  depos- 
ited to  secure  its  circulation  should  not  be  considered  as 
evidence  of  capital ;  but  the  system  never  recovered  from  the 
shock.  The  circulation  outstanding  at  the  beginning  of  1861 
was  $12,320,694.  The  average  loss  to  note  holders  was  40 
per  cent.  But  for  the  advent  of  the  Civil  War  it  is  probable 
that  free  banking  in  Illinois  would  have  followed  the  same 
course  as  in  New  York,  —  that  the  securities  would  have 
been  gradually  toned  up  to  par,  the  laws  made  more  stringent, 
and  central  redemption  required. 

The  free  bank  system  was  adopted  in  Indiana  in  1852 
and  in  Wisconsin  in  1853.  The  law  of  the  former  state  was 
very  similar  to  that  of  Illinois.     The  differences  were  that 


THE   FREE   BANK   SYSTEM  3 19 

in  Indiana  the  auditor  might  issue  circulating  notes  to  the 

full  amount  (instead  of  80  per  cent)  of  the  face  value  of  the 

securities  deposited,  and  that  each  bank  must 
Indiana.  ...  ,  ,  , 

have  specie  m  its  own  vaults  equal  to  12^  per 

cent  of  its  circulating  notes,  —  a  requirement  that  was  not 

generally  complied  with.      The  downfall  of  the  system  in 

Indiana  was  even  more  precipitate  and  disastrous  than  in 

Illinois. 

The  free  banking  law  of  Wisconsin   allowed  the  bank 

comptroller  to  issue  circulating  notes  to  the  full  amount  of 

the  bonds  of  states  deposited  with  him  by  banks.     It  allowe.d 

him  also  to  receive  the  first  mortgage  bonds  of  any  railroad 

in  the  state  twenty  miles  long,  or  divisional  mortgage  bonds 

on  sections  of  road  of  not  less  than  forty  miles,  such  road  to 

be  first  inspected  as  to  its  physical  condition 
Wisconsin.  ,        .  .       ^  X  1  1    , 

by  the  governor,  the  Attorney-General,  and  the 

bank  comptroller,  or  any  two  of  them.  On  such  securities 
80  per  cent  of  circulating  notes  could  be  issued,  and 
one-half  of  the  securities  of  any  bank  might  consist  of  rail- 
road bonds  of  this  description.  Stockholders  were  required 
to  give  their  personal  bonds  to  the  extent  of  one-fourth  of  the 
amount  of  the  circulating  notes,  as  security  against  deprecia- 
tion of  the  other  securities.  Except  in  this  particular  the 
shareholders  were  not  liable  beyond  the  amount  of  their 
capital  invested.  This  law  was  no  better  than  those  of 
Illinois  and  Indiana,  but  it  was  better  administered.  The 
comptroller  was  more  careful  about  the  securities  he  took, 
and  as  a  consequence  the  banks  were  better  fortified  when 
the  strain  came.  Yet  they  ended  in  disaster  and  disorder, 
the  city  of  Milwaukee  being  the  scene  of  riots  in  June,  1861, 
in  consequence  of  the  depreciated  currency. 

The  free  bank  system  was  adopted  permissively  in  Canada 
in  1850.  There  it  was  brought  in  competition  with  the  sys- 
tem of  chartered  banks,  which  was  then  substantially  the 


320  BANKING 

same  as  that  of  the  New  England  States.  Only  six  banks 
were  organized  under  it,  although  special  advantages  were 
offered  in  the  way  of  exemption  from  taxation.  Their  cir- 
culation, which  reached  $1,080,684  in   1856,  ran  down  to 

$495,631  in  i860,  and  the  next  year  three  of 
in  canada.^"^        the  six  practically  withdrew  from  the  field,  and 

now  only  one  remains.  The  reason  for  the 
failure  of  the  system  was  that  the  free  banks  could  not  com- 
pete with  their  neighbors  and  rivals  in  business.  When  the 
system  was  started,  the  Canadian  government  debentures 
paid  6  per  cent  interest  and  could  be  bought  at  a  price  which 
netted  7  per  cent  to  the  investor.  The  advocates  of  the  sys- 
tem said  that  this  would  furnish  an  ample  margin  of  profit, 
—  that  the  banks  would  get  7  per  cent  on  their  deposited 
bonds,  plus  whatever  they  could  obtain  from  the  loan  of  their 
circulating  notes.  This  was  a  half  truth.  The  fact  was 
overlooked  that  the  other  banks,  having  their  capital  free 
(not  locked  up  in  government  debentures),  could  lend  three 
or  four  dollars  of  credit  for  every  dollar  of  cash  in  hand  and 
could  use  their  circulating  notes  as  well  as  the  free  banks 
could  use  theirs.  Thus  the  business  opportunities  were  in 
favor  of  the  chartered  banks.  A  similar  competition,  with 
similar  results,  took  place  between  free,  or  bond-deposit, 
banks  and  chartered  banks  in  Massachusetts,  Ohio,  and 
Louisiana.     The  former  were  crowded  out. 


RECAPITULATION 

Until  the  year  1838  nobody  could  engage  in  the  business 
of  banking  in  the  state  of  New  York  without  a  special 
charter.  Thus  had  grown  up  a  bank  monopoly  which  had 
been  the  cause  of  political  corruption  and  bribery  of  the  legis- 
lature. These  abuses  led  to  a  popular  reaction  and  to  the 
passage  of  a  law  enabling  any  person,  or  association  of 


THE    FREE   BANK   SYSTEM  32 1 

persons,  to  engage  in  the  business  of  banking  on  condition 
of  securing  their  circulating  notes  by  the  pledge  of  public 
stocks,  or  of  such  stocks  and  bonds  and  mortgages  together, 
to  be  lodged  in  the  hands  of  the  comptroller  of  the  state. 
In  case  of  the  failure  of  any  bank  the  comptroller  was 
required  to  sell  the  securities  and  apply  the  proceeds  to  the 
redemption  of  the  notes. 

The  first  bank  failure  under  this  system  took  place  in  1840. 
Its  securities  realized  only  sixty-eight  cents  on  the  dollar  of 
its  outstanding  notes.  Twenty-six  free  banks  failed  between 
the  years  1839  ^"^  1^44)  ^^^  their  notes  were  redeemed  at 
the  average  rate  of  only  seventy-six  cents  on  the  dollar. 
These  results  proved,  not  that  the  system  was  bad,  but  that 
it  was  defective  in  details.  Then  the  law  was  amended,  so 
that  only  the  stocks  of  the  United  States  and  of  the  state  of 
New  York  should  be  accepted  as  security  for  the  note  issues 
of  the  free  banks,  while  bonds  and  mortgages  were  excluded 
altogether.  After  these  amendments  had  been  made  the  notes 
of  banks  which  became  insolvent  were  redeemed  at  par. 

In  several  of  the  states  which  followed  the  example  of 
New  York  the  free  bank  system  proved  a  disastrous  failure, 
in  consequence  of  the  badness  of  the  securities  authorized 
to  be  taken.  Before  these  states  had  time  to  perfect  the 
system  the  Civil  War  began  and  the  national  bank  act  soon 
afterward  superseded  all  other  systems. 

Authorities  for  Chapters  X  and  XI 

Knox's  History  of  Banking  in  the  United  States. 

Root's  New  York  Bank  Currency  {Sound  Currency^  Vol.  II, 
No.  5). 

Hammond's  History  of  Political  Parties  in  the  State  of  New 
York. 

Breckenridge's  Canadian  Banking  System. 

Reports  of  the  Bank  Comptroller  of  New  York. 


CHAPTER    XII 
CHAOS   OF  BANKING  IN  THE  XIX  CENTURY 

The  orderly  conditions  of  banking  at  the  beginning  of  the 
twentieth  century  cannot  be  fully  appreciated  without  a  glance 
at  the  chaos  which  prevailed  during  the  greater  part  of  the 
nineteenth.  Some  of  the  disorders  have  been  detailed  in  pre- 
ceding chapters,  but  they  give  a  very  inadequate  idea  of  the 
miseries  endured  by  the  people  before  the  second  Bank  of 
the  United  States  was  established  and  for  some  thirty  years 
after  it  ceased  to  exist. 

The  usual  method  of  starting  a  bank  was  as  follows :  First, 
a  charter  was  obtained  from  the  state  legislature.  This 
would  form  the  basis  of  a  speculation.  It  was  customary  to 
subscribe  for  a  much  larger  number  of  shares  than  one 
expected  to  get.  One  bank  is  said  to  have  had 
Bank  Charters  ^^  authorized  capital  of  $100,000,  whereas  the 
subscriptions  amounted  to  $8,000,000.  In 
Philadelphia  the  struggle  at  the  windows  of  the  offices  where 
subscriptions  were  taken  was  often  attended  with  severe 
personal  injury.  "  The  most  disgraceful  riots  that  occur  in 
Philadelphia,"  says  Gouge,  "  are  those  which  are  produced 
by  the  opening  of  the  books  of  subscription  for  a  new 
bank."  If  the  competition  had  been  very  brisk,  the  shares 
would  generally  command  a  premium  after  the  books  were 
closed.  This  was  the  chief  aim  of  the  speculators.  Then 
the  capital  would  be  paid  mostly  in  stock  notes.  The  inter- 
est on  the  stock  notes  would  be  offset  by  the  dividends  on 
the  shares,  with  a  surplus  to  the  speculators,  provided  the 

322 


BANKING   IN   THE   XIX   CENTURY  323 

bank  did  not  break.  If  the  times  happened  to  be  unpropitious 
and  a  suspension  of  specie  payments  followed,  the  state 
legislatures  were  lenient,  the  banking  fraternity  was  power- 
ful, and  public  opinion  was  so  lifeless  that  the  business 
might  go  on  just  as  well  as  before,  or  even  better,  since 
there  would  then  be  no  restraint  upon  the  bank's  issues.  As 
the  activities  of  banking  at  that  time  took  the  form  of  note 
issues  rather  than  of  deposits,  the  losses  resulting  from  bank 
failures  were  widely  diffused.  They  fell  upon  the  whole 
community,  but  especially  upon  farmers,  mechanics,  wage- 
earners,  washerwomen,  and  other  poor  people,  who  did  not 
have  bank  accounts,  but  into  whose  pockets  the  worthless 
notes  had  found  their  way. 

There  were  general  suspensions  of  specie  payments  in 
1814,  1818,  1837,  1S4I5  ^^^  i^57>  besides  the  suspension  of 
the  Civil  War  period, —  1861-79.  There  were  some  crises  in 
which  the  banks  which  continued  to  pay  specie  were  excep- 
tions to  the  general  rule.  There  were  also  many  partial 
suspensions,  where  large  groups,  although  not  a  majority, 

of  banks  failed:    and  there  were   individual 
Bank  Failures.  .  ,  .  .     , 

suspensions  without  number,  many  or  them 

fraudulent,  and  all  entailing  indescribable  suffering  on  the 
poorer  classes.  Such  misery  was  inflicted  upon  the  country 
that  some  of  the  states  in  their  constitutions  entirely  pro- 
hibited the  existence  of  banks  within  their  limits.^     Most 

1  The  writings  of  W.  M.  Gouge  and  Condy  Raguet,  like  the  pages  of 
Niles'  Register,  are  filled  with  particular  instances  of  downright  fraud, 
and  of  reckless  speculation  which  can  hardly  be  distinguished  from 
fraud,  in  the  establishment,  operation,  and  closing  of  banks  in  the  first 
half  of  the  nineteenth  century.  For  example :  the  Towanda  Bank  of 
Pennsylvania  established  its  credit  and  gained  a  large  circulation  by 
having  an  agent  to  redeem  its  notes  in  Philadelphia.  Suddenly  the 
agent  stopped  redeeming  them.  "  Hundreds  of  poor  laborers,"  said  the 
Public  Ledger,  "  were  to  be  seen  running  in  every  direction  with  their 
hands  full  of  the  trash  and  not  able  to  induce  a  broker  to  give  a  sixpence 


324  BANKING 

commonly,  however,  the  banking  fraternity  controlled  the 
state  governments. 

A  report  made  to  the  legislature  of  North  Carolina  in  1828 
disclosed  the  following  facts.  The  bank  of  Cape  Fear  and 
the  bank  of  Newbern  were  chartered  in  1804.  The  nominal 
capital  of  each  was  $800,000.     In  each  case  the  law  required 

that  this  should  be  paid  in  gold  or  silver,  but 
North  Carolina       ^^  ^^^  "°^  ^°  paid.    Upon  this  fraudulent  basis 

they  issued  notes  to  the  amount  of  more  than 
$3,000,000,  which  they  issued  for  discounting  paper,  drawing 
6  per  cent  interest,  "  so  that,"  says  the  report,  "  for  the  use 
of  their  notes,  which,  intrinsically,  were  of  no  value  at  all, 
the  stockholders  of  these  two  banks  have  drawn  from  the 
people  by  way  of  interest  something  like  $200,000  annually." 
The  state  bank  of  North  Carolina  was  incorporated  in  18 10 
with  a  capital  of  $1,600,000.  In  18 19  these  three  banks 
entered  into  an  agreement  with  each  other  not  to  pay  specie, 
and  their  circulating  notes  immediately  fell  to  15  per  cent 
discount.  They  then  introduced  a  clause  into  the  promissory 
notes  which  they  discounted,  requiring  payment  in  specie ; 
that  is,  they  lent  their  own  irredeemable  notes  to  the  public 
on  condition  that  payment  should  be  made  in  coin.  The 
specie  so  received  was  used  to  buy  up  their  own  circulating 
notes  at  a  discount.  At  the  time  when  the  investigation  was 
made  the  state  bank  had  less  than  $1000  specie  in  its  vaults. 
In  view  of  these  shocking  revelations  the  recommendation 
of  the  legislative  committee  was  that  the  Attorney-General 
should  be  directed  to  institute  proceedings  for  forfeiture  of 
charter.     Even  that  suggestion  failed ;  for,  when  the  banks 

on  the  dollar  for  them.  We  passed  in  the  market  a  woman  who  makes 
her  living  by  selling  butter,  eggs,  and  vegetables,  who  had  almost  all 
she  was  worth,  about  $17,  in  Towanda  bank  notes.  When  apprized 
that  it  was  worthless,  she  sank  down  in  agony  upon  her  stool  and  wept 
like  a  child." 


BANKING  IN  THE   XIX  CENTURY  325 

threatened  to  call  in  their  loans,  the  legislature  immediately 

became  deaf  and  the  people  dumb. 

The  state  of  Georgia  in  18 18  gave  to  the  bank  of  Darien  a 

charter,  which  provided  that  in  every  case  where  a  demand 

was  made  on  the  bank  for  the  redemption  of  its  notes  in 

specie  the  cashier  might  require  the  person 
In  Georgia.  ,  •  ,        ,  i  ,  .... 

makmg  the  demand  to  take  an  oath  m  writing 

"that  such  notes  or  bills  so  presented  for  payment  are  not 
the  property  of  any  other  bank,  company,  or  incorporation." 
The  bank  enlarged  this  privilege  by  adopting  a  rule  that 
every  person  presenting  its  notes  for  redemption  must  take 
an  oath  in  the  bank,  before  a  justice  of  the  peace  and  in  the 
presence  of  five  directors  and  the  cashier,  that  he  was  the 
owner  of  the  notes  and  was  not  acting  as  the  agent  of  anybody 
else.  Of  course,  if  it  was  very  inconvenient  for  the  bank  to 
pay,  it  could  thus  protect  itself;  for  it  would  be  very  diffi- 
cult for  the  other  party  to  bring  a  justice  of  the  peace,  five 
directors,  and  the  cashier  together.  In  other  words,  the  bank 
assumed  power  to  suspend  and  resume  payments  at  its  own 
pleasure. 

The  exercise  of  this  power  as  against  strangers  was  favored 
by  public  opinion,  not  only  in  Georgia,  but  throughout  the 
South  and  West.  Anybody  coming  from  a  distance  to  draw 
specie  from  a  bank  incurred  the  odium  of  the  community. 
In  such  cases  the  bank  was  considered  justified  in  paying 
the  most  inconvenient  kind  of  coin  and  in  taking  the  longest 
time  to  count  it.  In  some  cases  persons  who  claimed  their 
rights  against  banks  in  this  way  were  threatened  with  tar 
and  feathers.  Public  authority  over  banks  was  equally 
paralyzed.-^ 

1 "  We  search  almost  in  vain  through  the  law  reports  for  any  decisions 
on  the  rights  or  authority  of  the  state  over  banks,  or  the  duties  of  banks 
to  the  state.  It  may  be  said  that  no  attempts  were  made  to  test  or 
enforce  the  rights  of  the  state  against  banks  and  that,  as  a  matter  of 


326  BANKING 

A  number  of  chartered  banks  existed  in  Michigan  in  1837 

Early  in  that  year  she  passed  a  banking  law  which,  in  some 

of  its  features,  anticipated  the  free  bank  act  of  New  York. 

It  provided  that  any  number  of  freeholders,  not  less  than 

twelve,  might  organize  themselves  as  a  bank 

In  Michigan.  ,  ,       1         r        1         •      •  1  •     , 

and  open  books  of  subscription  to  the  capital 

stock  thereof,  10  per  cent  to  be  paid  in  specie  at  the  time 
of  subscribing,  and  not  less  than  30  per  cent  before  com- 
mencing business.  The  banks  were  required  also  to  deposit 
security  with  the  auditor-general  of  the  state  for  their  circu- 
lating notes  and  other  liabilities.  The  securities  might  be 
bonds  and  mortgages  or  the  personal  bonds  of  resident 
freeholders,  to  be  approved  by  the  treasurer  and  clerk  of  the 
county,  and  they  were  to  be  held  for  the  debts  of  the  banks 
in  case  the  other  assets  should  prove  inadequate.  In  the 
following  December  another  act  was  passed  providing  for 
the  appointment  of  three  commissioners  to  visit  and  inspect 
all  the  banks  every  three  months  and  especially  to  examine 
their  specie.  This  act  also  made  a  change  in  the  system  of 
deposited  securities,  by  providing  that  they  should  consist 
of  bonds  and  mortgages  only. 

The  commissioners  started  on  their  journey  in  January, 
1838.  They  found  that  the  state  had  been  plentifully 
littered  with  banks,  but  that  the  basis  for  most  of  them  was 
one  lot  of  specie,  which  was  used  in  each  case  until  the 
formalities  of  the  law  were  complied  with  and  then  passed 
on  to  the  next.  In  other  cases  no  specie  had  been  seen  at 
any  time,  but  incantations  had  been  held  with  imaginary 

practice,  it  had  none.  The  banks  were  almost  irresponsible.  Such 
decisions  as  bear  at  all  on  the  authority  of  the  state  over  banks  proceed 
from  the  attempts  of  the  banks  to  resist  the  exercise  of  any  authority 
whatever.  For  instance,  the  banks  which  had  charters  resisted  the 
appointment  of  Bank  Commissioners,  which  was  an  exercise  of  visitorial 
power,  and  was  the  lever  by  which  the  state,  after  1840,  began  to  reduce 
the  banks  to  order." —  Sumner's  Bankings  p.  352. 


BANKING   IN   THE    XIX   CENTURY  32/ 

gold  in  the  form  of  specie  certificates  and  specie  checks. 
The  commissioners  learned  that  a  watch  was  kept  on  their 
movements  and  that  when  they  were  expected  to  visit  a  cer- 
tain bank  the  requisite  amount  of  specie  would  be  sent  ahead 
one  day  or  one  night,  so  that  it  might  be  inspected  and  then 
withdrawn  for  the  use  of  the  next  bank.  But,  as  the  specie 
in  circulation  at  that  time  was  mostly  of  foreign  origin,  after 
a  particular  lot  had  been  inspected  two  or  three  times  it  could 
be  identified  by  the  preponderance  of  coins  of  this  or  that 
country,  or  by  special  marks  on  some  of  them.  In  this  way 
the  commissioners  easily  discovered  the  deception.  Yet  in 
every  case  somebody  was  found  to  swear  that  the  specie 
belonged  to  the  bank  and  that  it  was  intended  to  be  kept 
there  for  the  sole  business  of  that  bank.  Many  of  these 
institutions  were  located  in  the  depths  of  forests  where  there 
were  few  human  habitations,  but  plenty  of  wild  cats.  Thus 
they  came  to  be  known  as  the  "wild-cat  banks."  Forty  of 
these    so-called   banks    went    into    operation 

"Wild-Cat  under  the  law  of  1837,  with  a  nominal  capital 

Banks." 

of  $3,900,000,  and  all  but  four  of  them  failed 

before  December,  1839.  The  failure  of  the  free  banks 
discredited  the  chartered  banks  also  and  brought  all  of  them 
down  except  three.  The  people  of  the  state,  who  did  not  then 
number  above  100,000  and  were  very  poor,  were  left  with 
$1,000,000  of  worthless  bank  notes  in  their  hands,  for  which 
they  had  given  their  products  and  their  labor.  When  an 
attempt  was  made  to  realize  on  the  mortgage  securities,  the 
Supreme  Court  pronounced  the  free  banking  act  unconsti- 
tutional and  void.^ 

The  bewildering  state  of  the  paper  currency  before  the 
Civil  War  may  be  learned  from  the  numerous  bank-note 
Reporters  and  counterfeit  detectors  of  the  period.  It  was 
the  aim  of  these  publications  to  give  early  information  to 

1  Felch's  Early  Banks  and  Banking  in  Michigan. 


328  BANKING 

enable  the  public  to  avoid  spurious  and  worthless  notes  in 
circulation.  These  were  of  various  kinds  :  (i)  ordinary 
counterfeits  ;  (2)  genuine  notes  altered  from  lower  denomi- 
nations to  higher  ones;  (3)  genuine  notes  of 
^Imsmtes.  f^^^^^  b^^^s  altered  to  the  names  of  solvent 
banks  ;  (4)  genuine  notes  of  solvent  banks 
with  forged  signatures  ;  (5)  spurious  notes,  such  as  those  of 
banks  that  had  no  existence ;  (6)  spurious  notes  of  good 
banks,  as  20's  of  a  bank  that  never  issued  20's  ;  (7)  notes  of 
old,  closed  banks  still  in  circulation. 

The  number  of  counterfeit  and  spurious  notes  was  quite 
appalling,  and  disputes  between  payer  and  payee  as  to  the 
goodness  of  notes  were  of  frequent  occurrence,  ranging  over 
the  whole  gamut  of  doubts,  —  as  to  whether  the  issuing  bank 
was  sound  or  unsound,  whether  the  note  was  genuine  or 
counterfeit,  and,  if  sound  and  genuine,  whether  the  discount 
was  within  reasonable  limits.  All  merchants  kept  "bank-note 
Reporters  "  for  ready  reference.  If  there  was  a  bank  in  the 
town,  the  cashier  was  appealed  to  constantly  by  citizens  to 
pass  upon  the  goodness  of  notes  in  circulation. 

BicknalVs    Counterfeit   Detector   and    Bank-Note  List  of 
January  i,   1839,  contained  the  names   of   fifty-four  banks 
that  had  failed  at  different  times  ;    of  twenty 
Detecto^r*  fictitious  banks,  the  pretended  notes  of  which 

were  in  circulation  ;  of  forty-three  other  banks, 
for  the  notes  of  which  there  was  no  sale  ;  of  two  hundred 
and  fifty-four  banks,  the  notes  of  which  had  been  counter- 
feited or  altered  ;  and  enumerated  thirteen  hundred  and 
ninety-five  descriptions  of  counterfeited  or  altered  notes  then 
supposed  to  be  in  circulation,  of  denominations  from  one 
dollar  to  five  hundred. 

Twenty  years  later  Nicholas'  Bank-Note  Reporter  had  fifty- 
four  hundred  separate  descriptions  of  counterfeit,  altered,  and 
spurious  notes.     The  number  of  this  Reporter  for  November, 


BANKING   IN   THE   XIX   CENTURY  329 

1858,  described  thirty  different  counterfeits  of  the  notes  of 
the  Bank  of  Delaware,  Wilmington.  They  were  one  i,  three 
2's,  twelve  5's,  seven  lo's,  four  20's,  two  50's,  and  one  100. 
The  known  counterfeits  of  the  Bank  of  Kentucky,  Louisville, 
were  three  I's,  two  2's,  two  3's,  one  4,  two  5's,  four  lo's, 
seven  20's,  four  56^,  two  loo's,  and  one  500,  —  twenty-eight 
in  all.  The  same  number  were  catalogued  of  the  State  Bank 
of  Ohio,  namely,  four  I's,  five  2's,  two  3's,  four  5's,  nine 
lo's,  two  20's,  one  50,  and  one  100,  with  the  remark  appended 
to  the  last :  "  Bank  never  issued  any."  Descriptions  of  the 
latest  counterfeits  were  inserted  conspicuously  on  the  first 
page  of  each  number.  Thus  the  first  page  of  Thompson^ s 
Reporter  for  June  11,  1857,  had  warnings  against  fourteen 
spurious  and  altered  notes  which  had  made  their  appear- 
ance since  its  last  issue.  Extra  sheets  of  the  same  publica- 
tion in  1859  had  notices  like  the  following : 

i's,  2's,  3's  and  5's  of  the  Wisconsin  Miner's  Bank  are  in  cir- 
culation ;  there  is  no  such  bank. 

Notes  of  the  broken  Farmer's  Bank  of  Rhode  Island  are 
appearing  altered  to  the  other  Farmer's  Banks  in  various  cities  and 
States. 

Counterfeiters  have  become  possessed  of  a  large  batch  of  the 
worthless  notes  of  a  concern  called  the  Thames  Bank,  Laurel, 
Ind.,  and  have  commenced  altering  them  to  represent  bills  of 
various  good  banks  —  the  Thames  Bank  of  Norwich,  Conn.,  and 
the  Conway  Bank,  Mass.,  and  others. 

Bank  of  Mobile.  Genuine  impressions  of  the  20's,  50's  and 
I  go's  of  this  bank  with  forged  signatures  are  in  circulation. 

There  was  a  publication  called  Monroe^ s  Descriptive  List 
of  Genuine  Bank  Notes.  This  contained  thirteen  hundred 
and  twenty-three  separate  descriptions  of  notes.  Frequently 
the  banks  which  found  their  notes  successfully  counterfeited 
would  destroy  the  plates  and  get  new  ones  engraved,  with 
the  result  that  they  had  two  or  three  kinds  of  genuine  notes 


330  BANKING 

in  circulation  at  once,  thus,  of  course,  adding  much  to  the 

confusion.     There  was  also  a  Hst  of  broken,   closed,  and 

worthless  banks.    This  was  kept  standing  in  all  the  Reporters. 

There  were  forty  such  credited  to  New  York  City  at  one 

time  and  one  hundred  and  twenty-five  more  to  other  parts  of 

the  state.     Rates  of  discount  on  all  bank  notes  that  were 

not  at  par  in  New  York  were  quoted  in  all  the  Reporters. 

The  auditor  of  Illinois  advertised  November  9,  1861,  that 

he  would  redeem  the  notes  of  one  hundred  and  thirty-nine 

banks  named  by  him,  at  various  rates  ranging  from  40  to  90 

cents  per  dollar. 

Among  the  minor  abuses  of  banking  was  the  practice  of 

requiring  borrowers  to  leave  on  deposit  a  certain  proportion 

of  the  amount  borrowed,  —  in  some  cases  40  per  cent,  — 

so  that  the  bank  could  lend  the  difference  to  somebody  else 

and  thus  get  double  interest.     The  practice  of 
Minor  Abuses.         .        .  1  i       i  .  •  , 

issumg  post  notes,  payable  thirty  or  sixty  days 

after  date,  —  this  feature  being,  in  some  cases,  printed  in 

very  small  letters  so  that  an  ordinary  observer  would  not 

notice  it,  —  has  been  previously  referred  to.     Laws  were 

enacted  forbidding  the  issue  of  post  notes;  but  they  were 

evaded  by  the  device  of  lending  notes  on  condition  that  they 

should  be  put  in  circulation  at  a  certain  distance  from  the 

bank,  or  should  be  kept  out  a  certain  length  of  time,  or 

should  be  used  only  as  collateral  security  for  loans  at  other 

banks.     One  of  the  most  common  practices  was  to  pay  out 

the  notes  of  distant  banks  that  were  at  a  discount.     This 

practice  prevailed  largely  in  Chicago  and  the  surrounding 

country  from  1854  to  1859.     Most  of  the  bankers  in  that  city 

owned  banks  in  the  state  of  Georgia,  the  notes  of  which  they 

paid  out  for  the  commercial  paper  which  they  discounted. 

The  same  banks  sold  drafts  on  New  York  at  f  per  cent 

premium  in  exchange  for  these  notes ;  in  other  words,  they 

paid  out  the  notes  at  par  and  redeemed  them  at  a  discount. 


BANKING   IN  THE   XIX   CENTURY  331 

This  practice  was  sanctioned  by  law  and  public  opinion,  and 
it  turned  out  that  these  unsecured  notes  of  banks  in  a  distant 
and  then  rather  inaccessible  state  were  intrinsically  better 
than  the  bond-secured  issues  of  the  banks  of  Illinois.  The 
former  had  assets  without  securities,  and  the  latter  had 
securities  without  assets.  None  of  the  Georgia-Chicago 
\banks  failed,  nor  did  the  discount  on  their  notes  ever  exceed 
I  per  cent.  The  condition  was  similar  to  that  which  existed 
in  New  England  before  the  corrective  measures  of  the  Suffolk 
Bank  system  were  applied. 

RECAPITULATION 

Grave  disorders  in  banking  prevailed  in  the  United  States 
during  the  larger  part  of  the  nineteenth  century.  They  were 
due  to  the  lack  of  public  regulation,  to  the  want  of  any 
uniform  system  applicable  to  all  parts  of  the  country,  and  to 
the  significant  fact  that  public  opinion  was  both  torpid  and 
unintelligent.  The  first  and  second  Banks  of  the  United 
States  had  been  overthrown  and  nothing  had  been  substi- 
tuted which  could  be  applied  to  the  entire  nation.  Their 
place  was  filled  by  multifarious  banks,  under  heterogeneous 
special  charters  and  systems,  of  which  sharpers  took  advan- 
tage to  plunder  the  unwary.  The  lack  of  public  regulation 
led  to  innumerable  frauds  and  miscalculations.  Want  of 
uniformity  opened  the  door  to  thousands  of  counterfeit  and 
spurious  notes,  by  means  of  which  many  people  lost  their 
earnings. 

An  active  and  intelligent  public  opinion  is  indispensable 
to  keep  banks,  as  well  as  other  institutions,  in  good  order ; 
and  for  this  there  is  no  possible  substitute.  It  is  not  suffi- 
cient that  the  banking  laws  be  good.  They  must,  above  all, 
be  promptly  and  inexorably  enforced,  and  this  cannot  happen 
unless  public  opinion  is  well  instructed  and  alert. 


332  BANKING 


Authorities 

Gouge's  Short  History  of  Battking  and  Paper  Money  in  the 
United  States. 

Raguet's  Treatise  on  Currency  and  Banking. 

Raguet's  Financial  Register. 

N iles'  Weekly  Register,  1 8 ii - 1 848 . 

Felch's  Early  Bariks  and  Banking  in  Michigan. 

Kinley's  Independent  Treasury. 

The  Batiker's  Magazine  and  Statistical  Register^  1 846  et  seq. 


CHAPTER   XIII 

SOME  NOTABLE  BANKS 

Notwithstanding  the  disorders  of  banking  in  the  West 
and  South  described  in  the  preceding  chapter,  there  were 

some  bright  spots  in  the  prevailing  gloom. 
oMndi^na^  The  most  notable  of  these  was  supplied   by 

the  State  Bank  of  Indiana.  This  was  a  sys- 
tem, or  group,  of  banks  modeled,  for  the  most  part,  upon  the 
Bank  of  the  United  States.  It  was  established  by  the  state 
legislature  in  1834,  after  the  bill  to  recharter  the  Bank  of 
the  United  States  had  been  vetoed  by  President  Jackson. 
The  capital  of  the  bank  was  $1,600,000,  all  of  which  was 
paid  in  specie  —  mostly  in  Spanish  and  Mexican  silver 
dollars.  One-half  of  the  capital  was  owned  by  the  state 
and  the  other  half  by  private  individuals;  but  the  state 
advanced  62  J  per  cent  of  the  private  subscriptions  as  a  loan 
at  6  per  cent  interest,  taking  mortgage  security  and  a  lien 
on  the  shares  for  repayment.  The  persons  subscribing  for 
shares  were  required  to  pay  37^  per  cent  of  their  subscrip- 
tions in  specie  before  the  state  advanced  the  remainder. 
The  state  procured  the  money  by  a  5  per  cent  loan  nego- 
tiated in  New  York.  The  securities  issued  were  termed 
"bank  bonds."  These  were  to  run  a  little  longer  than  the 
charter  of  the  bank  and  were  specially  secured  by  the  state's 
shares  in  the  bank  and  her  lien  on  those  of  the  private 
shareholders.  The  charter  was  to  continue  twenty-five  years, 
and  no  other  banking  corporation  was  to  be  created  or 
permitted  in  the  state  during  that  time. 

333 


334  BANKING 

The  bank  was  to  consist  of  one  parent  institution  at 
Indianapolis  and  ten  branches.  Each  branch  had  a  capital 
of  $160,000.  The  parent  institution  had  no  capital  under 
its  immediate  control,  differing  in  this  respect  from  the  Bank 

of  the  United  States.  It  consisted  of  a  presi- 
System"^^  dent  and  board  of  directors  who  supervised, 

examined,  and  controlled  the  whole.  The 
president  and  four  directors  were  chosen  by  the  legislature 
to  hold  office  five  years,  and  one  director  was  chosen  by  the 
private  shareholders  of  each  branch.  The  branches  were 
managed  by  the  local  shareholders,  subject  to  the  central 
board  at  Indianapolis.  The  number  of  branches  was  after- 
wards increased  to  thirteen  by  additional  capital,  of  which 
the  state  contributed  one-half.  The  earnings  of  each  branch 
belonged  to  its  own  shareholders  exclusively,  but  the  divi- 
dends were  declared  only  by  the  parent  bank.  Unpaid 
interest  on  loans,  whether  due  or  not  due,  could  not  be 
included  in  dividends.  Each  branch  was  liable  for  the 
debts  of  every  other  branch,  and  in  case  of  the  insolvency 
of  a  branch  had  to  pay  them  within  one  year;  but  the  state 
had  a  first  lien  on  the  assets  of  any  failed  branch  for  the 
reimbursement  of  its  stock.  The  branches  were  independent 
of  each  other  as  to  assets,  but  were  united  as  to  liabilities. 
This  had  the  effect  of  inducing  vigilance  on  the  part  of  all 
the  members  in  watching  each  other  and  of  inspiring  public 
confidence  in  the  stability  of  the  whole  institution. 

No  branch  could  lend  money  on  the  security  of  its  own 
stock.     No  officers  or  directors  could  borrow  on  terms  unlike 

those  offered  to  the  public,  or  indorse  for 
Charter    ^^  ^^^j^  other,  or  vote  on  questions  wherein  they 

were  financially  interested.  On  all  applica- 
tions for  loans  above  $500,  a  majority  vote  of  five-sevenths 
of  the  board  was  necessary,  and  this  was  to  be  entered  on  the 
minutes  with  the  names  of  the  directors  so  voting.     Directors 


SOME    NOTABLE    BANKS  335 

were  individually  liable  for  losses  resulting  from  infraction 
of  the  law,  unless  they  had  voted  against  such  infraction. 
The  insolvency  of  any  branch  was  to  be  deemed  fraudulent 
unless  the  contrary  were  proved.  In  any  case  of  insolvency 
adjudged  to  be  fraudulent  the  directors  were  to  be  liable 
for  the  debts  without  limit  ;  and  after  their  estates  were 
exhausted  the  other  stockholders  were  to  be  liable  for  an 
amount  equal  to  their  shares,  in  addition  to  the  amount  that 
had  been  paid,  or  ought  to  have  been  paid,  thereon.^  The 
debts  due  to  or  from  any  branch  (except  for  deposits)  were 
not  to  be  more  than  double  the  capital  of  that  branch.  Theo- 
retically, therefore,  each  branch  might  have  notes  outstand- 
ing to  double  the  amount  of  its  capital.  Its 
Notes**^°^  maximum  circulation  was  $4,000,000  (in  185 1), 

the  capital  being  then  $2,000,000.  The  notes 
were  signed  by  the  president  of  the  bank  and  were  issued  to 
the  branches  by  the  parent  bank.  Each  branch  was  required 
to  redeem  its  own  notes  in  specie  on  demand  and  to  receive 
the  notes  of  all  the  other  branches  at  par.  The  notes  were 
usually  taken  from  the  parent  bank  by  the  presidents  or 
directors  of  the  branches  traveling  on  horseback.  Mr.  Hugh 
McCulloch  (afterwards  Secretary  of  the  Treasury)  was  presi- 
dent of  the  Fort  Wayne  branch.     He  says  : 

Fort  Wayne  was  three  good  days'  ride  from  Indianapolis, 
mostly  through  the  woods.  For  fifteen  years  I  made  this  journey 
on  horseback  and  alone  with  thousands  of  dollars  in  my  saddle 
bags,  without  the  slightest  fear  of  being  robbed.  I  was  well 
known  upon  the  road  and  it  was  well  known  that  I  had  money 
with  me  and  a  good  deal  of  it,  and  yet  I  rode  unharmed  through 

1  The  clause  of  our  national  bank  act  which  makes  the  share- 
holders personally  liable  for  all  the  debts  of  a  bank  to  an  amount  equal 
to  the  par  value  of  their  shares,  in  addition  to  the  amount  invested  by 
them  in  the  bank,  made  its  first  appearance  on  this  continent  in  the 
charter  of  the  Gore  Bank  of  Hamilton,  Canada,  in  1835.  ^^^  provision 
in  the  charter  of  the  State  Bank  of  Indiana  fell  somewhat  short  of  that. 


336  BANKING 

the  woods  and  stopped  for  the  night  at  the  taverns  and  cabins  on 
the  way,  in  perfect  safety.^ 

Such  were  the  leading  features  of  this  renowned  bank.    Its 
success  was  due  to  the  excellence  of  the  rules  adopted  for 

its  government  and  to  the  sagacity  and  fidelity 
Examfnations*       ^^  ^^^  management.     It  was  always  under  the 

control  of  men  of  prudence  and  probity.  The 
managers  of  the  parent  bank  were  empowered  to  examine  the 
branches  as  often  as  they  saw  fit  and  were  required  to  do  so  at 
least  twice  each  year.  The  examinations  were  usually  made 
by  the  president.  They  were  always  thorough  ;  and,  as  no 
notice  was  given  of  the  time  when  the  examiner  would  come, 
no  special  preparations  could  be  made.  Mr.  McCulloch 
ascribed  the  success  of  the  bank  largely  to  the  intelligence, 
thoroughness,  and  frequency  of  the  examinations. 

The  bank's  charter  expired  in    1859,  and   it  went  into 
liquidation.      The    state   of   Indiana  realized    a   net  profit 

of  $3,500,000  —  over  and  above  the  interest 
Liquidation  P^^^  ^^  ^^^    bank   bonds  —  from    the    bank 

during  the  twenty-five  years  of  its  existence. 
The  private  shareholders,  on  the  average,  received  $153.70 
for  each  $100  paid  in,  besides  the  annual  dividends.  While 
the  process  of  liquidation  was  going  on,  a  bill  was  passed  by 
the  legislature  to  incorporate  the  Bank  of  the  State  of 
Indiana.  This  act  was  procured  by  certain  scheming  politi- 
cians, for  the  purpose  of  selling  their  rights  under  it  to  the 
owners  of  the  expiring  bank.  In  this  they  were  successful. 
The  old  bank  stepped  into  the  new  charter  and  entered 
upon  a  fresh  career  of  prosperity,  under  the  presidency  of 
Mr.  McCulloch  ;  but  the  state  had  no  share  in  it.  It  con- 
tinued until  1865,  when  the  federal  tax  of  10  per  cent  on 
the  notes  of  state  banks  crippled  its  operations. 

1  McCulloch's  M^u  and  Measures  of  Half  a  Centurv 


SOME   NOTABLE   BANKS  337 

Considered  as  a  continuous  institution  from  1834  to  1866, 
this  was  a  memorable  bank,  of  whose  history  the  country 
may  well  be  proud.  It  was  another  excellent  illustration  of 
the  "banking  principle."  ^  Its  loans  and  discounts  took  the 
form  of  note  issues,  rather  than  of  deposits,  in  the  proportion 
of  about  seven  of  the  former  to  one  of  the  latter.  This  was 
due  to  the  nature  of  its  environment,  as  it  was  situated  in  a 
sparsely  settled  agricultural  country,  where  bank  checks 
were  not  adapted  to  the  conditions  of  society.  For  a  circu- 
lating medium  bank  notes  were  better  adapted  to  the  wants 
of  the  people  than  specie.  Such  a  medium  was  supplied  by 
the  bank  at  all  seasons  of  the  year  and  in  exact  proportion 
to  the  demand  —  that  is,  in  proportion  to  the  offering  of  good 
paper  for  discount.^  After  1842  the  notes  of  the  bank  were 
always  redeemed  in  specie,  even  during  the 
crisis  of  1857,  when  all  the  banks  in  New 
England,  and  all  in  New  York  except  one  (the  Chemical), 
were  obliged  to  close  their  doors.  It  is  true  that  public 
opinion  in  the  West  did  not  then  require  the  payment  of 
deposits  in  specie.  If  a  bank  redeemed  its  notes  in  coin,  it 
might  pay  its  depositors  the  same  kind  of  currency  that  it 

1  See  page  297. 

2  "  It  is  of  course  true  that  for  more  than  thirty  years  the  entire  ten- 
dency of  banking  movements  in  the  United  States  was  toward  making 
the  notes  a  preferred  claim  against  the  assets,  and  moreover  against 
a  certain  portion  of  the  assets,  set  apart  in  a  particular  form  for  the 
purpose  of  securing  the  notes.  It  goes  without  saying  that  the  national 
banking  system,  the  culmination  of  that  movement,  furnishes  the  country 
with  the  most  reliable  banknote  circulation  it  has  ever  had.  No  one, 
of  course,  would  think  of  returning  to  the  chaos  that  prevailed  when 
each  State  had  its  own  system.  Yet  it  is  by  no  means  certain  that  the 
national  banking  system  can  be  made  permanent  on  the  present  basis 
of  bond  security.  If,  then,  it  becomes  necessary  to  reorganize  the  sys- 
tem, it  will  be  worth  while  to  examine  the  merits  of  this  Indiana  sys- 
tem of  federal  banks."  —  Harding's  Essay  on  the  State  Bank  of 
Indiana,  Sound  Currency y  Vol.  V,  No.  16. 


33^  BANKING 

habitually  received  from   them ;    but   the  deposits  of   the 

State  Bank  of  Indiana  were  so  small  a  part  of  its  liabilities 

that  it  could  have  met  that  test  also. 

When  the  bank  began  its  operations  in  1834,  the  state 

had  about  one  million  inhabitants ;  and  of  these  less  than 

one  thousand  were  engaged  in   mercantile  pursuits,  and  a 

still    smaller   number    in    manufactures.      Accordingly,   the 

demands    upon    the    bank    were    chiefly   for 
Mortgage  Loans.  ^  0,1 

mortgage  loans.      Such   loans   were   made   in 

considerable  amounts,  and  they  proved  embarrassing.  When 
the  troubles  of  1837  came  the  bank  could  not  realize  on  its 
mortgage  securities.  Its  officers  thus  learned  by  their  own 
experience  that  loans  on  land  security,  although  generally 
safe  in  the  long  run,  were  not  suitable  for  a  bank  whose 
liabilities  were  payable  on  demand.  It  accordingly  discon- 
tinued them  as  soon  as  practicable.  It  continued,  however, 
to  lend  money  largely  to  farmers  and  drovers  on  personal 
security  and  on  bills  of  exchange  drawn  against  shipments 
of  agricultural  products.  Here  it  found  its  true  source  of 
wealth,  and  here  the  agriculturists  found  an  ever  present 
help  in  time  of  need,  in  the  harvesting  and  disposing  of 
their  crops. 

About  the  time  that  the  State  Bank  of  Indiana  was  started 
a  Scottish  youth  named  George  Smith,  twenty-five  years  of 

age,  found  his  way  to  this  country.     A  native 
George  Smith.  **  ^  ^ 

of  Aberdeenshire,  he  came  hither  to  seek  his 

fortune,  and  he  found  it  in  due  time.      He  arrived  at  Chicago 

in    1834  and  invested  his  small  means  in  the  purchase  of 

real   estate  there.     Then   he   returned  to   Scotland,   where 

he  persuaded  certain  friends,  among  whom  was  Alexander 

Mitchell,  to  join  him  in  the  northwestern  part  of  the  United 

States.     In  1838  Smith  conceived  the  idea  of  establishing 

a  bank.     This,  however,  was  not  easy,  for  the  western  states 

and  territories  were  at  that  time  intensely  prejudiced  against 


SOME    NOTABLE   BANKS  339 

banks.     Smith   knew  that  he  could  not  obtain   a  charter 

directly,  but  thought   that   he  might  do  so  covertly.     The 

legislature  of  Illinois  had  recently  granted  a  charter  for 

an  institution  called  the  Chicago  Marine  and 

The  Wisconsin  Yive  Insurance  Company.  Smith  took  a  copy- 
Marine  and  Fire  ...  r  J  srj 
Insurance  Co.        of  this  instrument  to  Wisconsin  and  prevailed 

upon  the  territorial  legislature  to  pass  a  similar 
one,  which  became  law  on  February  28,  1839.  This  was  a 
charter  for  a  joint  stock  company  to  transact  the  business 
of  marine,  fire,  and  life  insurance.  It  excluded  "banking 
privileges  "  in  express  terms  from  the  powers  of  the  corpora- 
tors, but  it  authorized  them  to  receive  money  on  deposit  and 
to  loan  the  same  on  satisfactory  security.  As  the  phrase 
"  banking  privileges "  meant  the  right  to  issue  circulating 
notes,  this  was  prohibited.  Nevertheless,  Smith  and  his 
associates  began  to  issue  certificates  of  deposit,  in  the 
similitude  of  bank  notes,  payable  to  bearer.  These  certifi- 
cates were  in  denominations  of  $1.00,  $3.00,  $5.00,  and  $10, 
and  were  generally  known  as  "  George  Smith's  money." 
They  were  at  first  redeemed  in  specie  at  Milwaukee ;  but 
as  the  business  grew.  Smith  established  agencies  at  Chicago, 
Detroit,  Buffalo,  Galena,  and  St.  Louis,  where  New  York 
drafts  were  given  for  them  at  the  current  rate  of  exchange. 
The  paid-up  capital  of  the  company  was  $225,000,  all  of 
which  came  from  Scotland. 

As  the  legislature  had  never  intended  to  grant  a  charter 
for  a  bank,  it  had  enacted  no  regulations  for  one.     Smith 

and  Mitchell  were  therefore  "  wild  catting  "  in 
suppress^smith      ^^  most  barefaced  manner  and  the  legislature 

was  obliged  to  take  notice  of  this  fact.  At  the 
session  of  1843  ^  committee  was  appointed  to  investigate  the 
company.  Its  finances  were  found  to  be  in  a  sound  con- 
dition ;  yet,  since  it  had  issued  certificates  of  deposit  in  a 
form  not  contemplated  by  law,  the  committee  recommended 


340  BANKING 

that  the  charter  be  repealed.  This  recommendation  was  not 
adopted  then,  but  three  years  later  the  legislature  did  repeal 
the  charter  by  a  decisive  vote.  The  company  contended 
that  the  question  of  a  forfeiture  of  its  rights  must  be  deter- 
mined judicially,  and  it  published  a  notice  that  in  the  mean- 
time it  would  continue  its  business  and  redeem  its  certificates 
in  the  usual  manner  at  the  head  office  and  at  the  established 
agencies.  The  legislature  took  no  further  steps,  being 
restrained  perhaps  by  the  belief  that,  although  the  business 
transacted  by  the  company  was  irregular,  it  was  beneficial  to 
the  infant  community  and  that  a  sudden  termination  of  it 
might  prove  disastrous.  So  the  Wisconsin  Marine  and  Fire 
Insurance  Company's  bank  continued  to  exist.  Its  circula- 
tion under  the  charter  of  1839  reached  the  sum  of  $1,470,- 
235.  There  were  repeated  runs  on  it  for  specie,  but  they 
were  always  successfully  met.^ 

This  institution  supplies  a  fresh  illustration  of  the  *' bank- 
ing principle."      Smith  discounted  the  promissory  note  of 
Mr.  A,  a  wheat  buyer,  for  say  $10,000,  by  writing  that  sum, 
minus  the  interest  for  ninety  days,  opposite  A's  name  in  the 
bank's   ledger  and   making  a  corresponding 

Monly^-^""'*^'  ^^^^y  ^^  ^'^  P^^^  ^°°^'  ^^^^  became  A's 
deposit  and  the  bank's  liability.  The  act  of 
writing  was  ipso  facto  the  issuance  of  the  bank's  credit.  It 
was  immaterial  whether  A  exercised  his  right  by  drawing 
his  checks  and  handing  them  to  various  people  or  by  taking 
the  whole  amount  in  circulating  notes,  but  he  took  notes 

1  "During  this  fruitful  period  (1850  to  i860)  of  immigration,  settle- 
ment, rapid  growth  and  marvelous  development  of  the  resources  of  this 
great  commonwealth,  the  Wisconsin  Marine  and  Fire  Insurance  Com- 
pany was  able,  in  spite  of  a  dubious  charter  and  hostile  legislation,  to 
supply  all  the  channels  of  money  circulation  in  the  Northwest  and  in  the 
valley  of  the  Mississippi,  with  a  constantly  increasing  stream  of  currency, 
the  integrity  of  which  remained  to  the  last  absolutely  unquestioned." 
—  Hadden's  History  of  State  Banks  of  Wisconsin, 


SOME   NOTABLE   BANKS  34 1 

because  the  people  from  whom  he  bought  wheat  could  not  use 
bank  checks.  He  disbursed  them  among  farmers,  who  paid 
them  to  country  storekeepers,  to  farm  laborers,  teamsters, 
school  teachers,  clergymen,  doctors,  etc.  By  and  by  they 
reached  the  hands  of  the  city  merchant,  who  wished  to  make 
remittances  to  New  York  or  Boston.  He  took  the  notes  to 
Smith  and  obtained  drafts  on  those  cities  at  the  current  rate 
of  exchange.  It  was  no  advantage  for  him  to  draw  gold  for 
the  notes,  because  he  could  not  send  it  to  the  East  as  cheaply 
as  he  could  buy  Smith's  drafts.  The  wheat  buyer,  mean- 
while, had  shipped  his  grain  to  a  consignee  in  New  York, 
taking  a  bill  of  lading  from  a  steamboat.  He  had  made  a 
draft  on  the  consignee,  had  attached  the  bill  of  lading  to  it, 
and  sold  it  to  Smith,  thus  paying  his  indebtedness  to  the 
bank  and  having  something  left  over  for  his  own  profit. 
This  draft  had  enabled  Smith  to  have  funds  in  New  York 
to  pay  the  drafts  which  he  sold  to  the  merchants. 

The  farmers  would  have  received  gold  for  their  wheat,  if 
they  had  not  taken  Smith's  notes  ;  but  they  would  have  been 
obliged  to  wait  till  the  wheat  could  be  sent  to  the  eastern 
market  and  the  proceeds  returned,  or  else  to  secure  advances 
of  money  from  somebody  who  would  wait  for  repayment  till 
the  crop  had  been  sold.  Thus,  while  Smith's  profits  were 
large,  he  did  not  alone  reap  the  advantages  of  a  paper  medium 
of  exchange,  which  was  sound  in  fact,  although  unsound  in 
principle.  It  was  sound  in  fact  because  Smith  and  Mitchell 
were  good  bankers.  It  was  unsound  in  principle  because  it 
was  not  accompanied  by  safeguards  to  protect  the  community 
against  the  doings  of  less  honorable  and  less  prudent  men. 

*'  George  Smith's  money  "  was  an  elastic  currency.  There 
was  no  limit  to  his  issues,  except  his  ability  to  redeem  them, 
of  which  he  was  the  sole  judge.  Within  this  limit  he  dis- 
counted all  the  paper  that  he  considered  good.  He  gave  his 
own  paper  payable  on  demand  for  that  of  merchants  payable 


342  BANKING 

at  a  fixed  time.  His  own  paper  passed  from  hand  to  hand 
and  might  stay  out  a  whole  year.  In  the  fall,  when  the  crops 
began  to  move,  there  was  no  lack  of  money  for  legitimate 

trade,  because  it  was  as  easy  to  put  out  these 
d'etre  f,^^^°^        Certificates  at  one  time  as  at  another.     In  the 

winter,  when  lake  navigation  was  closed,  the 
certificates  answered  all  the  purposes  of  a  local  circulating 
medium.  In  the  spring,  when  steamboats  began  to  move  on 
the  Great  Lakes,  bringing  new  settlers  and  cargoes  of  goods, 
the  certificates  came  back  to  headquarters  mainly  for  the 
purchase  of  New  York  drafts,  after  which  they  took  their 
usual  round  again. 

In  1853  the  state  of  Wisconsin  passed  a  law  requiring  all 
banks  to   deposit  security  with   the  state    comptroller   for 

their  circulating  notes.  As  this  kind  of  bank- 
Retirement  ^"S  ^^^  ^^^  ^^^^  Smith,  he  sold  his  interest 

in  the  Wisconsin  Marine  and  Fire  Insurance 
Company  and  estabUshed  at  Chicago  an  institution  called 
the  Bank  of  America.  He  then  bought  two  banks  in  Georgia, 
the  notes  of  which  he'  paid  out  at  the  Bank  of  America  by 
discounting  commercial  paper.  These  notes  he  redeemed  by 
giving  drafts  on  New  York  for  them  at  f  per  cent  premium. 
This  was  a  strictly  legal  operation  and  a  profitable  one.  The 
people  had  confidence  in  Smith,  and  the  business  prospered 
until  the  approach  of  the  Civil  War  admonished  him  to 
abandon  his  connection  with  Georgia.  He  then  retired  to 
his  native  land  and,  when  he  died  in  London  in  the  year 
1900,  he  left  one  of  the  most  colossal  fortunes  in  the  United 
Kingdom.  The  Wisconsin  Marine  and  Fire  Insurance  Com- 
pany became  a  free  bank  under  the  state  law  of  1853,  and 
is  now  a  national  bank. 

The  state  of  Louisiana  in  1842  passed  a  general  banking 
law  which  was  fit  to  be  a  model  for  other  states.  Its  princi- 
pal features  were  :•  (i)  the  specie  reserve  was  to  be  equal 


SOME   NOTABLE   BANKS  343 

to  one-third  of  all  liabilities  to  the  public  ;  (2)  the  other 
two-thirds  of  the  liabilities  were  to  be  represented  by  com- 
mercial paper  having  not  more  than  ninety 
^ct'ofX^^''^  days  to  run  ;  (3)  all  commercial  paper  to  be 
paid  at  maturity,  and  if  not  paid,  or  if  an 
extension  were  asked  for,  the  account  of  the  party  to  be 
closed  and  his  name  sent  to  the  other  banks  as  a  delinquent ; 
(4)  all  banks  to  be  examined  by  a  board  of  state  officers 
quarterly  or  oftener  ;  (5)  bank  directors  to  be  individually 
liable  for  all  loans  or  investments  made  in  violation  of  the 
law,  unless  they  could  show  that  they  had  voted  against  the 
same,  if  present ;  (6)  no  bank  to  have  less  than  fifty  share- 
holders, having  at  least  thirty  shares  each  ;  (7)  any  director 
going  out  of  the  state  for  more  than  thirty  days,  or  absenting 
himself  from  five  successive  meetings  of  the  board,  to  be 
deemed  to  have  resigned  and  this  vacancy  to  be  filled  at 
once  ;  (8)  no  bank  to  pay  out  any  notes  but  its  own  ;  (9) 
all  banks  to  pay  their  balances  to  each  other  in  specie  every 
Saturday,  under  penalty  of  being  immediately  put  in  liquida- 
tion. This  was  the  first  law  passed  by  any  state  requiring 
a  definite  percentage  of  specie  reserve  against  deposits,  and 
the  proportion  was  larger  than  is  now  considered  necessary. 
Under  this  law  Louisiana  became  in  i860  the  fourth  state 
of  the  Union  in  point  of  banking  capital  and  the  second  in 
point  of  specie  holdings.  It  is  a  matter  of  history  that  the 
Louisiana  Bank  Act  of  1842  was  strictly  and  intelligently 
enforced  until  the  city  of  New  Orleans  was  captured  during 
the  Civil  War,  twenty  years  later. 

The  State  Bank  of  Ohio  (established  in  1845),  like  the 
State  Bank  of  Indiana,  was  composed  of  branch  banks  under 
a  central  board  of  control.  The  law  of  1845  provided  that 
any  number  of  banks  not  less  than  seven,  then  existing  or 
to  be  organized  thereafter,  might  become  branches  of  the 
State  Bank  of  Ohio.    It  started  with  a  capital  of  $3,300,000. 


344 


BANKING 


Note  issuing  was  to  be  proportioned  to  capital,  in  the  fol- 
lowing manner  :  any  branch  might  issue  ^200,000  of  notes 
for  the  first  $100,000  of  capital,  $150,000  for  the  second 
$100,000  of  capital,  and  so  on.  In  this  way  a  bank  of 
$500,000  capital  might  issue  $650,000  of  notes.  Each  branch 
was  required  to  deposit  with  the  board  of  control  10  per 
cent  of  the  amount  of  its  circulating  notes,  either  in  specie 
or  in  bonds  of  the  state  of  Ohio  or  of  the  United  States,  as 
a  safety  fund  for  the  protection  of  the  holders  of  notes  of  all 
the  branches.  The  board  of  control  might  invest  any  money 
belonging  to  the  safety  fund  in  the  bonds  of  Ohio  or  of  the 
United  States,  or  in  mortgage  on  real  estate  in  the  county 
where  the  branch  was  situated,  worth  double  the  amount  of 
the  loan,  exclusive  of  buildings  or  other  destructible  property. 
The  interest  on  the  invested  fund  was  paid  to  the  branch 
making  the  deposit.  Each  branch  was  liable  for  the  circu- 
lating notes,  but  not  for  the  general  debts,  of  the  other 
branches.  In  case  of  the  failure  of  any  branch  to  redeem 
its  notes,  the  board  of  control  was  to  make  an  assessment 
pro  rata  on  the  other  branches  and  reimburse  them  as  soon 
as  the  assets  in  the  safety  fund  could  be  disposed  of ;  and 
then  the  safety  fund  was  to  be  reimbursed  out  of  the  assets 
of  the  failed  branch  before  any  other  creditors  were  paid. 
The  State  Bank  of  Ohio  had  thirty-six  branches  and  was 
highly  successful.     Its  charter  expired  in  1866. 

RECAPITULATION 

In  the  State  Bank  of  Indiana  (1834-66)  we  observe  in  a 
primitive  community  the  working  of  sound  rules  of  banking 
under  good  administration.  One-half  of  this  bank  was 
owned  by  the  state  and  the  other  half  by  private  citizens. 
It  consisted  of:  (i)  a  president  and  a  central  board  of 
directors,  whose  powers  were  those  of  general  supervision 


SOME  NOTABLE  BANKS  345 

and  regulation  only;  and  (2)  a  number  of  banks  in  different 
parts  of  the  state,  termed  branches  of  the  state  bank.  The 
members  of  the  central  board  had  nothing  to  do  with  the 
investment  of  funds  ;  consequently  they  were  not  exposed  to 
the  temptation  of  making  loans  to  themselves  or  to  favorites, 
in  contravention  of  good  business  principles.  The  capital 
and  profits  of  each  branch  belonged  to  its  own  shareholders 
exclusively,  but  each  branch  was  liable  for  the  debts  of  every 
other  branch.  The  branches  thus  had  a  motive  for  keeping  a 
watch  upon  each  other.  In  case  of  the  insolvency  of  a  branch 
by  reason  of  fraud  in  the  management,  the  directors  of  that 
branch  were  personally  liable  for  the  debts.  This  rule  was 
prescribed  in  order  to  insure  vigilance  on  the  part  of  the 
directors  in  keeping  watch  upon  the  administrative  officers. 
The  central  board  was  required  to  examine  the  affairs  of  each 
branch  in  detail,  at  least  twice  each  year.  These  examina- 
tions were  made  without  previous  notice  and  with  the  utmost 
thoroughness,  usually  by  the  president  in  person.  Each 
branch  was  allowed  to  have  circulating  notes  outstanding 
equal  to  twice  its  capital ;  but  the  notes  were  issued  to  them 
only  by  the  central  board,  and,  as  the  central  board  could  not 
issue  any  notes  to  the  public,  the  danger  of  overissues  was 
practically  nil.  The  bank  was  very  successful ;  for  no  branch 
ever  became  insolvent  and  it  maintained  specie  payments 
during  the  financial  crisis  of  1857.  The  state  of  Indiana 
reaped  a  large  pecuniary  profit  from  it. 

The  Wisconsin  Marine  and  Fire  Insurance  Company  was 
chartered  by  the  territorial  legislature  of  Wisconsin  in  1839, 
at  the  instance  of  a  Scotchman  named  George  Smith,  who 
became  its  president.  Under  the  terms  of  the  charter  he 
established  a  bank,  although  banking  privileges  had  been 
excluded  from  the  powers  granted  to  the  incorporators.  The 
company  issued  certificates  of  deposit  in  the  similitude  of 
bank  notes,  and  by  prudent  management  secured  for  them 


346  BANKING 

a  general  credit  and  acceptance  in  all  the  states  and  terri- 
tories north  and  west  of  Indiana.  The  company  became  the 
most  important  financial  institution  in  that  r:gion  and  for  a 
long  time  was  the  only  one  whose  notes  enjoyed  a  general 
circulation  there.  The  illegal  character  of  the  business 
transacted  by  the  company  attracted  the  attention  of  the 
territorial  legislature,  which,  in  1845,  repealed  its  charter,  but 
did  not  direct  the  Attorney-General  to  bring  suit  against  it 
for  forfeiture.  It  accordingly  continued  its  business  without 
interruption  and  its  circulation  eventually  reached  nearly 
$1,500,000.  Its  notes  were  always  redeemed  in  specie  at  its 
head  office  in  Milwaukee  and  in  drafts  on  New  York,  at  the 
current  rate  of  exchange,  at  its  agencies  in  Chicago,  St.  Louis, 
Galena,  Detroit  and  Buffalo.  Notwithstanding  the  taint  of 
illegality,  its  career  was  honorable  and  useful  to  the  commu- 
nity, as  well  as  the  source  of  large  profits  to  its  founders. 
The  Wisconsin  Marine  and  Fire  Insurance  Company's  Bank 
still  exists  at  the  place  of  its  birth. 

The  banks  of  Louisiana,  established  under  a  law  of  that 
state  passed  in  1842,  were  among  the  soundest  institutions  in 
the  country  or  in  the  world.  Their  strength  was  due  to  the 
excellent  rules  enacted  for  their  guidance  and  to  the  strict 
enforcement  of  the  same  by  public  officials,  who  were 
required  to  examine  their  affairs  at  least  once  every  three 
months.  This  law  was  the  first  one  enacted  in  America 
requiring  banks  to  keep  a  cash  reserve  in  a  definite  propor- 
tion to  their  deposits  and  circulation. 

The  State  Bank  of  Ohio  (1845-66)  was  composed  of  a 
central  board  of  control,  similar  to  that  of  the  State  Bank  of 
Indiana,  and  of  branch  banks  (eventually  thirty-six  in  num- 
ber), each  of  which  was  liable  for  the  note  issues,  but  not  for 
the  general  debts,  of  all  the  others.  Each  branch  was 
required  to  make  a  deposit  with  the  board  of  control  equal 
to  10  per  cent  of  its  circulation,  either  in  money  or  in  bonds 


SOME   NOTABLE   BANKS  347 

of  the  state  or  of  the  United  States,  as  a  safety  fund  for  the 
security  of  the  notes  of  all  the  branches.  Each  was  entitled 
to  the  interest  derived  from  its  share  of  the  safety  fund. 
The  State  Bank  of  Ohio  was  always  solvent  and  successful. 

Authorities 

Sumner's  History  of  Banking  in  the  United  States. 
Knox's  History  of  Banking  in  the  United  States. 
Harding's  "  State  Bank  of  Indiana  "  {Sound  Currency^  Vol.  V, 
No.  16). 

Hadden's  History  of  State  Banks  of  Wisconsiti. 

Strong's  History  of  Wisconsin  Territory. 

The  Banker'' s  Magazine  and  Statistical  Register^  1 846-66. 


^ 


CHAPTER   XIV 
THE  NATIONAL  BANK  SYSTEM 


,  The  national  bank  act  was  a  product  of  the  Civil  War. 
In  1 86 1  Mr.  Chase,  the  Secretary  of  the  Treasury,  conceived 
the  plan  of  making  the  bank-note  circulation  of  the  country 
a  means  of  enlarging  the  sales  of  government 
s"s?em°^  *^®  securities.  In  his  report  for  that  year  he  sug- 
gested that  Congress  should  take  control  of 
the  national  circulation  and  require  that  it  be  secured  by  the 
deposit  of  government  bonds  in  the  Treasury.  Among  the 
advantages  to  be  gained,  he  said,  would  be  uniformity  of 
style,  uniformity  of  goodness,  and  a  large  demand  for  gov- 
ernment securities.  Of  these  three  merits  the  last  was  not 
the  most  important,  although  it  then  seemed  so.  Uniformity 
of  the  currency,  in  both  appearance  and  quality,  was  a  boon 
of  inestimable  value,  upon  which  rests  Mr.  Chase's  title  to 
fame  ;  yet  the  expectation  that  the  scheme  would  be  a 
great  financial  aid  to  the  government  was  the  real  motive 
for  its  adoption.  In  point  of  fact  it  contributed  very  little 
aid.  The  transition  from  the  old  system  to  the  new  was 
so  slow  that  only  $98,896,488  of  national  bank  notes  were 
outstanding  on  the  3d  of  April,  1865,  the  month  in  which 
General  Lee's  army  surrendered.  This  was  less  than 
4  per  cent  of  the  money  borrowed  by  the  government  for 
the  war. 

The  first  attempt  to  pass  a  national  bank  bill  in  the  House 
was  defeated  on  July  12,  1862.  In  the  following  Decem- 
ber the  Secretary  renewed  his  recommendation  with  great 

348 


THE   NATIONAL  BANK  SYSTEM  349 

earnestness,  and  President  Lincoln  repeated  it  in  his  annual 
message,  notwithstanding  which  it  was  defeated  again  in 
January,  1863.  Recourse  was  then  had  to  the  Senate,  where 
it  was  passed  by  the  close  vote  of  23  to  21.  Then  the  House 
yielded  and  passed  the  Senate  bill  without  amendment  by  78 
votes  to  64.  It  became  a  law  on  February  25,  1863.  Mr. 
Hugh  McCulloch  of  Indiana,  who  had  come  to  Washington  to 
oppose  it,  became  the  first  comptroller  of  the 
paSingthe^Biu.  currency  under  it.  He  suggested  so  many 
amendments  that  a  complete  revision  of  the 
act  was  made  by  Congress  the  following  year,  and  passed  on 
June  3,  1864.  There  was  no  discriminating  tax  on  the  notes 
of  state  banks  in  the  original,  or  in  the  amended,  act.  In 
February,  1865,  a  bill  imposing  a  tax  of  10  per  cent  on  such 
notes  was  passed  in  the  House  by  a  majority  of  one  vote 
and  in  the  Senate  by  a  majority  of  two.  It  did  not  become 
operative,  however,  until  August  i,  1866.  . 

The  most  important  features  of  the  national  bank  act  at 
the  present  time  are  the  following : 

There  is  a  bureau  in   the  Treasury  Department  having 

charge  of  all  matters  relating  to  national  banks,  the  chief 

officer  of  which  is  the  comptroller  of  the  cur- 
Comptroller.  _^.  -      ™        .      _  ^^ 

rency.     His  term  of  office  is  five  years.     He 

is  required  to  present  to  Congress  an  annual  report  showing 

the  condition  of  each  national  bank  and  an  abstract  of  the 

condition  of  all  of  them. 

Any  number  of  persons  not  less  than  five  may  form  an 

association  for  banking  purposes,  to  continue  not  more  than 

twenty  years.     After  the  association  is  formed  it  is  within 

the  discretion  of  the  comptroller  to  give  it 
Organization.  _  ,,.,.,  .      ,  r 

a   certificate   (which  is  the    equivalent  of   a 

charter)  or  not.     The  law  requires  that,  before  granting  a 

certificate,  he  shall  satisfy  himself  that  the  persons  forming 

the  association  are  of  good  character,  and  that  they  have 


350  BANKING 

paid  in  the  amounts  of  money  required  for  the  legitimate 

objects  contemplated  by  the  national  bank  act.     He  may 

•ascertain  these    facts  by  means   of   a   special   commission 

appointed  by  him  for  the  purpose,  if  he  chooses ;  and  if,  for 

any  reason,  he  declines  to  grant  the  certificate,  he  is  not 

required  to  give  his  reasons  for  withholding  it. 

No  national  bank  can  be  organized  with  a  capital  smaller 

than  $25,000,  and  banks  of  this  size  can  be  organized  only 

in  places  of  three  thousand  inhabitants  or  less.     Banks  with 

a  capital  of  not  less  than   $50,000   may  be   organized   in 

places  of  not  exceeding  six  thousand  inhabitants.     In  places 

of  more   than   six   thousand   and   less   than   fifty  thousand 

inhabitants  there  shall  be  no  bank  with  a  capital  smaller 

than    $100,000.     In   cities   of   fifty  thousand 
Capital  Stock.         . 

inhabitants,  or  more,  there  shall  be  no  bank 

with  a  capital  smaller  than  $200,000.  The  sanction  of  the 
Secretary  of  the  Treasury,  in  addition  to  that  of  the  comp- 
troller of  the  currency,  is  required  for  the  granting  of 
a  certificate  for  a  bank  of  less  than  $100,000  capital, 
because  greater  precautions  are  supposed  to  be  needed 
in  the  establishment  of  the  smaller  banks  than  of  the 
larger  ones.  Yet  experience  has  not  proved  that  the 
former  are  more  liable  to  failure  than  the  latter.  At  least 
50  per  cent  of  the  capital  must  be  paid  in  before  the  bank 
can  begin  business,  and  the  remainder  must  be  paid  in 
monthly  instalments  of  not  less  than  10  per  cent  each.  If 
any  instalments  are  not  so  paid,  the  shares  must  be  adver- 
tised and  sold  to  other  persons.  If  no  purchaser  is  found 
within  three  weeks,  the  amount  already  paid  must  be  for- 
feited to  the  association.  The  shares  of  the  bank  must  be 
of  $100  each. 

The  powers  of  banks  are  limited  to  the  discounting  and 
negotiating  of  promissory  notes,  drafts,  bills  of  exchange, 
and  other  evidences  of  debt ;    receiving  deposits ;    buying 


THE   NATIONAL  BANK   SYSTEM  35  I 

and  selling  exchange,  coin,  and  bullion ;  loaning  money  on 
personal  security  ;  ^  and  issuing  circulating  notes.     They  are 

not  allowed  to  hold  real  estate  permanently 
Powers.  ,  ,  /      ,  -^ 

except  such  as  may  be  necessary  for  the  trans- 
action of  their  business.  If  they  acquire  other  real  estate  as 
security  for  bad  debts,  they  must  sell  it  within  five  years.  If 
a  bank  were  allowed  to  hold,  for  indefinite  periods,  lands  and 
buildings  thus  acquired,  its  whole  capital  might  gradually  be 
absorbed  in  that  way,  and  thus,  although  solvent,  it  might 
cease  to  be  a  bank. 

Each  bank,  before  commencing  business,  must  deposit 
with  the  Treasurer  of  the  United  States  a  certain  amount  of 
registered  bonds  of  the  United  States,  whether  it  issues  cir- 
culating notes  or  not.  If  the  capital  of  the  bank  exceeds 
$150,000  it  must  deposit  at  least  $50,000  of  bonds.  If  the 
capital  is  $150,000  or  less,  it  must  deposit  an  amount  equal 
to  one-fourth  of  its  capital.     The  act  of  1864  required  all 

banks  to  deposit  bonds  to  the  amount  of  one- 
Deposit  of  Bonds.     ,.,,,.  .     .        rr^. 

third  of  their  capital.       Ihe  main  purpose  of 

the  clause  was  to  sell  bonds  in  the  exigency  of  war.     After 

the  exigency  had  passed  away  the  clause  was  modified  so 

that  a  bank  of  $10,000,000  capital  is  not  required  to  deposit 

more  than  one  of  $200,000.     No  good  reason  now  exists  why 

1  The  act  of  1863  authorized  banks  to  make  loans  "on  real  and  per- 
sonal security."  In  the  act  of  1864  the  words  "real  and"  were  omitted. 
It  is  therefore  unlawful  for  a  national  bank  to  lend  money  on  mortgage 
security  but  it  may,  in  order  to  save  a  bad  debt,  take  such  security 
for  loans  previously  made  in  good  faith.  The  prohibition  of  mortgage 
loans  as  a  feature  of  banking  law  is  first  found,  on  this  side  of  the 
ocean,  in  the  charter  of  the  Bank  of  Montreal,  dated  March  17,  1821, 
where  it  stands  in  these  words  as  one  of  the  powers  granted  :  "  To  take 
and  hold  mortgages  and  hypotheques  on  real  property  for  debts  con- 
tracted to  it  in  the  ordinary  course  of  its  dealings,  but  on  no  account  to 
lend  on  land,  mortgage,  or  hypoth^que,  nor  to  purchase  them  on  any  pre- 
text except  as  here  permitted." — Breckenridge's  Canadian  Banking 
System^  p.  24. 


352  BANKING 

a   bank   without   circulation    should   keep    any   permanent 

deposit  of  bonds  in  the  Treasury. 

The  business  of  a  bank  must  be  managed  by  a  board  of 

not  less  than  five  directors,  each  of  whom  must  own  not  less 

than  ten  shares  of  the  capital  stock  not 
Directors. 

hypothecated  or  pledged  as  security  for  debt. 

If  any  director  shall  cease  to  be  the  owner  of  ten  shares,  he 

shall   thereby  cease  to   be   a  director.     Vacancies  in   the 

board  of  directors  shall  be  filled  by  appointment  made  by 

the  remaining  directors. 

State  banks  may  enter  the  national  system  by  conforming 
to  the  provisions  of  the  national  bank  act,  and  any  state 
bank  having  branches  may  continue  to  have  the  same 
branches  after  entering  the  national  system. 

The  shareholders  of  a  national  bank  shall  be  held  indi- 
vidually responsible  for  all  the  debts  of  the  bank,  to  an 
amount  equal  to  the  par  value  of  their  shares, 

i^^y^^t^JJi^  in  addition  to  the  amount  invested   therein. 

Shareholders. 

An  exception  was  made  in  favor  of  any  bank 
"  now  existing  under  state  laws  having  not  less  than 
$5,000,000  of  capital  actually  paid  in  and  a  surplus  of  20 
per  cent  on  hand."  There  was  only  one  such  bank  existing 
when  the  law  was  passed,  —  the  Bank  of  Commerce  in  New 
York,  —  the  shareholders  of  which  are  accordingly  exempt 
from  the  double  liability  clause. 

Each  bank  shall  be  entitled  to  receive  from  the  comp- 
troller of  the  currency  an  amount  of  circulating  notes  equal 

to  the  par  value  of  the  bonds  deposited  by  it, 
Kotes^*^"^  but  not  exceeding  the  market  value  thereof, 

and  not  exceeding  its  capital  stock  actually 
paid  in.  Whenever  the  market  value  of  the  bonds  deposited 
is  reduced  below  the  amount  of  the  circulation,  the  comp- 
troller may  demand  the  deposit  of  additional  bonds,  or  of 
money,  equal  to  the  deficiency.     Bonds  may  be  withdrawn 


THE  NATIONAL  BANK  SYSTEM  353 

by  banks  by  retiring  their  circulating  notes  or  by  depositing 
lawful  money  to  an  equal  amount  in  the  Treasury.  Only 
$9,000,000  in  the  aggregate  can  be  thus  retired  in  one 
month,  nor  can  the  amount  of  bonds  deposited  be  reduced 
below  the  limitations  above  stated.  The  notes  are  receiv- 
able at  par  for  all  dues  to  the  United  States  except  duties  on 
imports,  and  are  payable  for  all  debts  owing  by  the  United 
States  within  the  United  States,  except  for  interest  on  the  pub- 
lic debt  and  for  redemption  of  the  national  currency.  Every 
bank  must  receive  the  notes  of  every  other  bank  at  par  in 
payment  of  any  debt  due  to  itself.  No  notes  shall  be  issued 
of  less  denomination  than  $5.00,  and  only  one-third  of  the 
amount  issued  to  any  bank  shall  be  of  the  denomination  of 
$5.00.  Each  bank  must  redeem  its  circulating  notes  on 
demand  at   its  own  counter.     It   must   also 

Son''^^^^""^"  ^^^^  ^^^  ^^^P  ^"^  deposit  in  the  Treasury 
of  the  United  States,  in  lawful  money,  a  sum 
equal  to  5  per  cent  of  its  circulation,  to  be  held  for  the 
redemption  of  such  circulation  when  presented  in  sums  of 
$Tooo  or  any  multiple  thereof.  The  cost  of  transportation 
and  of  assorting  the  notes  must  be  paid  by  the  bank  issuing 
the  same.  All  defaced  and  mutilated  notes  received  at  the 
Treasury  shall  be  replaced  by  new  ones  at  the  expense  of 
the  issuing  bank. 

Any  bank  depositing  lawful  money  in  the  Treasury  for 
retiring  its  circulation  shall  pay  in  advance  for  transporting 
and  redeeming  the  same  a  sum  equal  to  the 
c?cuSion.°*  average  cost  of  the  redemption  of  national 
bank  notes  for  the  preceding  year.  At  the 
expiration  of  the  charter  of  any  bank  all  of  its  outstanding 
notes  shall  be  redeemed  as  they  reach  the  Treasury ;  and  if 
the  charter  is  renewed,  new  notes  of  different  design  and 
corresponding  amount  shall  be  issued  to  the  bank.  At  the 
end  of  three  years  from  the  expiration  of  the  old  charter  the 


354  BANKING 

bank  shall  deposit  in  the  Treasury  lawful  money  sufficient 

to  redeem  the  old  circulation  still  outstanding.     Any  gain 

resulting   from    the    loss,    destruction   or  disappearance   of 

notes  shall  inure  to  the  benefit  of  the  United  States.^     No 

bank   can   issue  post  notes  or  any  notes  to   circulate  as 

money  except  as  authorized  by  the  national  bank  act. 

In  case  of  default  by  any  bank  in  the  redemption  of  its 

circulating  notes,  the  comptroller  must  declare  the  security 

bonds   forfeited    to    the    United    States    and 

Redemption  of       n-[yQ  notice  to  the  holders   of   the   notes  to 

Failed  Bank  '^  ,  ,       rr. 

Notes.  present  them  at  the  Treasury   for   payment, 

"  and  the  same  shall  be  paid  as  presented,  in 
the  lawful  money  of  the  United  States."  Then  the  comp- 
troller may  in  his  discretion  cancel  the  bonds  to  an  equiva- 
lent sum,  or  sell  at  public  or  private  sale  so  much  of  them 
as  may  be  necessary.  In  case  of  a  deficiency  in  the  pro- 
ceeds of  all  the  bonds  to  reimburse  the  government  for  the 
redemption  of  the  notes,  the  United  States  shall  have  a 
paramount  lien  on  all  the  assets  of  the  bank  (which  includes 
the  liability  of  shareholders),  and  the  deficiency  must  be 
made  good  before  any  other  debts  are  paid.  When  the 
notes  are  paid,  they  must  be  canceled. 

Each  bank  must  pay  to  the  .Treasurer  of  the  United 
States  a  tax  of  one-fourth  of  i  per  cent  each  half  year  on 

the  average  amount  of  its  notes  in  circulation 

Tax  on  Circu-       ^hen  said  notes  are  secured  by  the  deposit  of 
lation.  .  . 

bonds  of  the  United  States  bearing  interest 

at  2  per  cent  per  annum.     When  secured  by  bonds  bearing 

1  The  gain  resulting  to  the  government  after  the  expiration  of  the 
first  series  of  twenty-year  charters  and  until  November  i,  1901,  from  the 
non-presentation  of  bank  notes  for  redemption  has  been  ^2,975,250. 
The  amount  of  notes  outstanding  during  the  period  fluctuated  between 
;^i 00,000,000  in  1865  and  ^340,000,000  in  1875.  The  rate  of  destruc- 
tion and  loss  of  notes  in  the  hands  of  the  people  may  be  roughly  esti- 
mated at  I  per  cent  in  twenty  years. 


THE   NATIONAL   BANK   SYSTEM  355 

a  higher  rate  of  interest,  the  tax  is  one-half  of  i  per  cent 
each  half  year.  The  tax  does  not  apply  to  circulation,  for 
the  retirement  of  which  lawful  money  has  been  deposited  in 
the  Treasury. 

All  notes  used  for  circulation  as  money  other  than  those 
issued  under  these  conditions  by  national  banks  are  subject 
to  a  tax  of  10  per  cent,  to  be  paid  by  the  person,  firm,  asso- 
ciation, corporation,  state  bank,  town,  city,  or  municipal 
corporation  which  issues  or  pays  them  out. 

Every  bank  in  certain  cities  of  500,000  or  more  inhabit- 
ants, called  reserve  cities,  must  keep  a  reserve  of  lawful 
money  equal  to  25  per  cent  of  its  deposits.  All  other  banks 
must  keep  a  like  reserve  of  15  per  cent,  but  three-fifths  of 
the  said  15  per  cent  may  consist  of  balances  on  deposit  in 

banks   approved  by  the  comptroller,   in   the 
Legal  Reserve.  .  .  1       ,    .       , 

reserve  cities.     Any  bank  m  the  reserve  cities 

may  keep  one-half  of  its  reserve  as  deposits  in  a  "central 
reserve  city,"  i.e.^  New  York,  Chicago,  or  St.  Louis.  Both 
gold  certificates  and  silver  certificates  shall  be  counted  as 
part  of  the  reserve.  The  5  per  cent  redemption  fund  on 
deposit  with  the  Treasurer  of  the  United  States  shall  also 
be  counted  as  part  of  the  reserve.  Failure  to  keep  the  legal 
reserve  is  followed  first  by  notice  from  the  comptroller  to 
make  good  the  reserve  within  thirty  days.  In  case  of  fail- 
ure to  do  so,  the  comptroller  may,  with  the  concurrence  of 
the  Secretary  of  the  Treasury,  put  the  bank  in  liquidation. 
This  clause  is  rather  for  warning  than  for  immediate 
enforcement.  No  bank  would  be  excused  for  stopping  pay- 
ment of  its  deposits  when  it  still  had  25  per  cent  of  the 
same  in  cash.  Whether  severe  measures  should  be  taken, 
in  case  the  reserve  were  below  the  legal  limit,  would  depend 
upon  the  general  character  of  the  bank  and  the  nature  of 
its  assets.  Banks  when  below  their  legal  reserve  are  not 
allowed  to  increase  their  liabilities  by  making  new  loans  or 


356  Banking 

discounts  otherwise  tlian  by  purchasing  bills  of  exchange 

payable  at  sight,  or  to  make  any  dividend  of  profits  until 

their  reserve  has  been  restored. 

Banks   are  allowed  to  charge   such  rates   of  interest  on 

loans  as  are  allowed  by  the  law  of  the  state  in  which  they 

are  situated,  and  no  more,  but  in  discounting 
Usury. 

bills  of  exchange  on  other  places  they  may 
charge  the  current  rate  of  exchange  in  addition. 

One-tenth  of  the  net  profits  must  be  carried  to  the  surplus 
fund  of  each  bank  until  the  surplus  is  equal  to  20  per  cent 
of  the  capital. 

A  bank  must  not  lend  more  than  one-tenth  of  its  capital 
to  one  person,  corporation,  or  firm,  directly  or  indirectly. 
But  the  discount  of  bills  of  exchange  drawn  in  good  faith 
against  actually  existing  values,  and  the  discount  of  commer- 
cial or  business  paper  actually  owned  by  the 
Restrictions.  .     .  ,  ,     „  , 

person  negotiatmg  the  same,  shall  not  be  con- 
sidered as  money  borrowed.  A  bank  must  not  lend  money 
on  the  security  of  its  own  shares,  nor  be  the  purchaser  or 
holder  of  its  own  shares  unless  they  are  taken  as  security 
for  a  debt  previously  contracted  in  good  faith,  and  shares 
so  taken  must  be  sold  within  six  months. 

No  bank  can  become  indebted  to  an  amount  exceeding  its 
unimpaired  capital  except  for  circulating  notes,  deposits, 
drafts  drawn  against  its  own  funds,  and  dividends  due  to  its 
own  shareholders.  No  bank  can  permit  any  part  of  its  cap- 
ital to  be  withdrawn  in  the  form  of  dividends  or  otherwise. 
If  the  capital  is  impaired  by  bad  debts  or  otherwise,  the 
deficiency  must  be  made  good  within  three  months  after 
receiving  a  requisition  from  the  comptroller,  under  penalty  of 
being  put  in  liquidation.  No  bank  can  certify  a  check  for  a 
customer  for  more  money  than  he  has  on  deposit  at  the  time. 

Each  bank  must  make  to  the  comptroller  not  less  than  five . 
reports  each  year,  showing  its  condition  at  dates,  already 


THE   NATIONAL   BANK    SYSTEM  357 

past,  to  be  designated  by  him,  and  he  may  call  for  special 

reports  from  any  particular  bank  whenever  he  chooses  to 
do  so,  which  reports  shall  be  published  in  a 
newspaper  in  the    place  where  the  bank  is 

situated,  and  at  the  expense  of  said  bank. 

The  shares  of   national   banks  are  liable  to  taxation  by 

authority  of  the  states  in  which   they  are  situated,  at  the 

same  rates  as  other  moneyed  capital  owned 
State  Taxation. 

by  the  citizens  of  such  states,  but  the  shares 

of  any  national  bank  owned  by  non-residents  of  a  state  shall 

be  taxed  in  the  city  or  town  where  the  bank  is  located  and 

not  elsewhere. 

The  comptroller  of  the  currency,  with  the  approval  of 

the  Secretary  of  the  Treasury,  shall  appoint  suitable  persons 

to  make  examinations  of  the  affairs  of  every 
Bank  Examiners.  _        ,  ,  ,        r   n  1     1        •,     1 

bank  and  to  make  full  and  detailed  reports 

thereon  to  the  comptroller.  The  fees  allowed  by  law  to  the 
examiners  shall  be  paid  by  the  banks  examined. 

In  case  of  the  insolvency  of  a  national  bank  the  comp- 
troller of  the  currency  may  appoint  a  receiver,  who  shall  take 
possession  of  its  books,  records,  and  assets  and  proceed  to 
wind  up  its  affairs  and  enforce  the  personal  liability  of  the 

shareholders.     A  receiver  may  be  appointed 
Receivers. 

also  in  case  the   capital   stock  of  a  bank  is 

reduced  below  the  legal  minimum  and  remains  so  for  thirty 
days ;  also  for  failure  to  make  good  its  lawful  money  reserve 
within  thirty  days  after  notice  ;  also  for  purchasing  or  acquir- 
ing its  own  stock  except  to  prevent  loss  upon  a  debt  previ- 
ously contracted  in  good  faith  ;  also  for  the  false  certification 
of  a  check. 

No  bank  can  either  give  or  receive  national  bank  notes  or 
United  States  notes,  or  gold  certificates,  or  silver  certificates 
as  security  for  a  loan  of  money,  or  agree  for  a  consideration 
to  withhold  such  notes  or  certificates  from  use. 


3S8  BANKING 

It  is  not  lawful  for  any  person  to  design,  engrave,  print, 
or  use  any  handbill  or  advertisement  in  the  likeness  or  sim- 
ilitude of  the  circulating  notes  or  other  obligations  of  any 
national  bank,  or  intentionally  mutilate,  deface,  or  disfigure 
any  such  notes  or  obligations. 

The  penalty  of  fine  and  imprisonment  is  imposed  for 
counterfeiting  bank  notes  or  knowingly  passing  or  attempt- 
ing to  pass  counterfeited  notes;  also  for  issuing  the  circu- 
lating notes  of  banks  that  have  expired;  also  for  falsely 
certifying  checks;  also  for  embezzling  the  funds  of  banks 
or  putting  the  notes  of  a  bank  in  circulation  without  author- 
ity from  the  directors;  also  for  making  a  false  entry  in  the 
books  or  reports  of  a  bank  with  fraudulent  intent,  or  aiding 
or  abetting  the  same. 

Any  national  bank  may  be  designated  by  the  Secretary  of 
the  Treasury  as  a  depositary  of  public  money.    A  certain 
number  have  been  so  designated,  in  places  where  no  sub- 
treasury  exists,   for  the  convenience   of   the 
Public  Deposits. 

government  in  making  local  disbursements. 

These  are  called  regular  depositaries,  and  the  deposits  of 
the  government  therein  are  running  accounts  like  th'ose 
of  private  persons,  upon  which  no  interest  is  paid.  Deposits 
made  in  banks  for  the  purpose  of  restoring  funds  to  the 
money  market  are  termed  special  deposits,  for  the  with- 
drawal of  which  notice  is  given  in  advance,  and  upon  these 
the  act  of  May  30,  1908,  provides  that  interest  shall  be  paid 
at  such  rate  as  the  Secretary  of  the  Treasury  may  prescribe, 
not  less  than  i  per  cent  per  annum. 

On  Sept.  I,  1909,  the  number  of  national  banks  exist- 
ing was  6977.^  The  table  on  the  following  page  is  a  con- 
densed abstract  of  their  condition  at  that  time  as  shown  in 
the  comptroller's  annual  report : 

1  September  30,  19 10,  the  number  of  banks  was  7173,  and  the  capital 
i?5i,oo2,735,i23. 


THE   NATIONAL   BANK    SYSTEM 


359 


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36o  BANKING 

RECAPITULATION 

The  national  banking  system  was  born  of  the  financial 
exigencies  of  the  Civil  War.  Its  plan  was  outlined  by 
Secretary  Chase  .in  1861,  and  was  recommended  by  him 
to  Congress  as  a  means  of  promoting  the  sale  of  govern- 
ment bonds,  and  incidentally  of  securing  uniformity  of 
design  and  uniformity  of  value  in  the  national  currency. 
The  sale  of  government  bonds  was  to  be  promoted  by 
requiring  that  all  national  bank  notes  be  secured  by  the 
deposit  of  such  bonds  in  the  Treasury.  Congress  did  not, 
however,  approve  of  the  plan  when  first  presented.  The 
bill  to  carry  it  into  effect  was  twice  rejected  by  the  House 
of  Representatives,  but  was  passed  by  both  houses  in  Febru- 
ary, 1863,  and  revised  and  repassed  in  June,  1864.  In 
1865  an  act  was  passed  imposing  a  tax  of  10  per  cent  on 
the  notes  of  state  banks.  The  intention  and  effect  of  this 
act  were  to  compel  such  banks  either  to  come  into  the 
national  system  or  to  cease  issuing  notes  to  circulate  as 
money. 

The  regulations  of  banking  adopted  in  the  act  of  1864 
were  selected  from  state  bank  systems  then  or  previously  in 
existence.  Most  of  these  regulations  can  be  found  in  the 
preceding  pages  of  this  work.  The  supreme  merit  of  the 
national  system  consists  in  the  unification  of  banking  in  all 
the  states  and  territories.  Aside  from  this,  the  only  new 
ideas  embodied  in  the  law  were  the  government's  immediate 
responsibility  for  the  note  issues  and  the  requirement  that 
each  bank  should  receive  the  notes  of  every  other  bank  at 
par  in  the  payment  of  dues  to  itself.  The  government's 
immediate  responsibility  for  the  notes,  however,  is  merely  a 
corollary  of  the  requirement  that  all  notes  shall  be  secured 
by  United  States  bonds  deposited  in  the  Treasury. 


CHAPTER   XV 

STATE  BANKS  AND  TRUST  COMPANIES 

Alongside  of  the  6977   national  banks,  and  competing 

with  them,  are   11,319  commercial  banks  operating  under 

state  charters,  with  an  aggregate  capital  of  $416,059,900  and 

deposits  amounting  to  $2,466,0 c;8,66t:.     The 
state  Banks.  ^        ,  .      .    ,  ,-      7,  \        r 

general    prmciples   applicable   to   the   former 

apply  also  to  the  latter,  but  there  are  differences  of  detail  : 
(i)  state  banks  are  prevented,  by  the  10  per  cent  federal 
tax,  from  issuing  circulating  notes  ;  (2)  national  banks  are 
required  by  law  to  keep  a  cash  reserve  of  2  5  or  1 5  per  cent, 
as  already  specified,  while  the  reserve  requirements  of  the 
several  states  are  various,  but  usually  smaller  than  those  of 
the  national  law  ;  (3)  no  national  bank  can  exist  with  a 
smaller  capital  than  $25,000,  but  some  states  allow  banks  of 
$5000  capital,  while  in  ten  states  there  is  no  minimum  of 
capital  fixed  by  law ;  ^  (4)  national  banks  are  not  permitted 
to  make  loans  on  real  estate  security;  there  is  no  such  re- 
striction on  state  banks,  but  in  some  states  the  amount  loan- 
able on  mortgage  is  limited  to  a  certain  proportion  of  the 
capital  ;  (5)  national  banks  are  subject  to  examination  and 
supervision  by  the  comptroller  of  the  currency.  State  super- 
vision of  incorporated  banks  is  of  various  kinds.  In  some 
states  regular  examinations  are  made  by  public  officers  ;  in 
others  they  are  made  only  at  the  instance  of  stockholders 
or  creditors  of  particular  banks  ;  in  others  the  only  require- 
ment is  a  report  from  the  bank's  officers  to  be  published  in 
the  newspapers. 

^  Bamett's  State  Banking  in  the  United  States,  p.  26. 
36X 


362  BANKING 

These  differences  in  law  and  practice  account  for  the 
existence  of  the  two  kinds  of  banks  running  on  parallel  lines 
throughout  the  country.^  Some  of  the  state  banks  are  incor- 
porated under  special  charters  of  ancient  date.  Of  this  kind 
is  the  Manhattan  Company  of  New  York.  Others  have 
been  organized  under  general  banking  laws,  and  still  others 
under  general  incorporation  laws  of  their  states. 

In  addition  to  these  are  many  private  banking  houses  not 
incorporated,  which  transact  the  business  of  deposit  and  dis- 
count.    Some  of  these  in  the  large  cities  are 
Private  Banks.  •       ,       ,  , 

of  great  magnitude,  but  do  not  usually  dis- 
count commercial  paper,  although  they  receive  deposits. 
They  are  financial  houses  engaged  in  promoting  new  enter- 
prises, issuing  letters  of  credit,  selling  bonds  of  railroads 
and  other  corporations,  making  loans  to  state  and  city  gov- 
ernments, etc.  The  rapid  growth  of  private  banking  in  recent 
years,  however,  has  been  chiefly  in  the  western  and  southern 
and  Pacific  states,  in  communities  not  large  enough  to  sup- 
port incorporated  banks.  In  some  states  private  bankers  are 
subjected  to  the  same  supervision  as  incorporated  banks, 
but  usually  they  are  a  law  unto  themselves,  and  this  laxity 
has  led  to  disastrous  consequences  in  certain  places  and 
especially  in  New  York  City,  where  foreign  immigrants  have 
been  defrauded  by  men  of  their  own  nationality,  setting 
themselves  up  as  bankers,  accumulating  deposits,  and  even- 
tually absconding  with  the  proceeds. 

1  In  the  starting  of  towns  in  the  West  a  bank  is  one  of  the  first 
adornments  of  the  new  community,  and  it  commonly  happens  that  the 
organizers  have  less  than  ^25,000  with  which  to  begin  operations.  So 
they  start  a  state  bank,  knowing  that  they  can  obtain  a  national  charter 
at  a  later  period,  if  they  desire  it.  A  recent  writer  says  that  in  some 
cases  two  or  three  banks  are  started  before  the  town  is  a  month  old  — 
all  being  state  banks.  Generally  the  managers  combine  the  banking 
business  with  real  estate  agencies,  fire  insurance,  life  insurance,  and 
farm  mortgages. 


STATE   BANKS   AND  TRUST  COMPANIES  363 

The  question  has  been  raised  in  recent  discussions  whether 
the  cash  reserves  of  state  banks  may  consist  in  whole  or  in 
part  of  national  bank  notes,  and  what  would  be  the  conse- 
quences of  so  using  them.    The  answer  is  that  bank  notes 

are  not  cash,  and  that  any  bank  which  treats 
CAsh  Reserves. 

them  as  such  incurs  the  risk  of  being  caught, 

in  some  financial  exigency,  without  sufficient  lawful  money 
to  meet  its  demand  obligations.  As  a  state  bank  cannot 
ordinarily  acquire  national  bank  notes  for  less  value  than  an 
equal  amount  of  gold  or  greenbacks,  there  seems  to  be  no 
good  reason  for  incurring  that  risk.  The  national  banking 
law  does  not  concern  itself  with  the  reserves  of  state  banks, 
but  it  prohibits  any  national  bank  from  pledging,  or  hypoth- 
ecating, its  circulating  notes  for  the  purpose  of  procuring 
money  to  be  used  in  its  banking  operations,  or  otherwise. 
Therefore  any  arrangement  made  between  a  national  bank 
and  a  state  bank  to  swap  temporarily  the  notes  of  the  one 
for  the  gold  of  the  other  would  be  unlawful. 

A  trust  company,  as  its  name  implies,  is  a  corporation 
organized  to  receive  and  perform  trusts  for  a  compensation 
fixed  by  law,  or  agreed  upon  by  the  parties  to  the  trust.    One 

of  the  most  common  forms  of  trust  is  that  of 
Trust  Companies. 

railway  mortgages,  where  the  trust   company 

becomes  the  mortgagee  in  trust  for  the  bondholders,  registers 
the  bonds,  collects  the  interest  as  it  becomes  due,  pays  it  to 
the  bondholders,  and  in  case  of  default  takes  legal  steps  to 
protect  their  interests.  But  in  the  progress  of  time  the  trust 
companies  drifted  into  the  banking  business,  buying  com- 
mercial paper,  lending  on  collaterals,  etc.,  so  that  in  the 
large  cities  the  trust  business  became  an  insignificant  part 
of  their  total  business,  perhaps  not  more  than  ^  or  6  per 
cent  of  the  whole.  Thus  they  have  become  important  rivals 
of  the  national  banks  in  the  principal  cities  of  the  Union. 
One  thousand  and  seventy-nine  companies  reporting  to  the 


364  BANKING 

comptroller  of  the  currency  in  1909  show  a  capital  of  $362,- 
763,223,  and  deposits  amounting  to  $2,831,835,177.  In  the 
year  1905  the  thirty-three  trust  companies  of  New  York  City 
held  $1,008,000,000  of  deposits,  while  the  national  banks  in 
the  same  territory  held  only  $947,000,000,  and  a  portion  of 
the  latter  consisted  of  deposits  made  by  and  belonging  to  the 
former.  The  bulk  of  the  reserves  of  the  trust  companies 
was  kept  as  deposits  in  the  banks,  for  which  deposits  they 
received  a  low  rate  of  interest.  They  were  thus  enabled  to 
pay  interest  to  individual  depositors,  which  the  banks  did 
not  do,  and  in  this  way  they  attracted  deposits  which  would 
otherwise  have  gone  to  the  banks.  Thus  there  was  an  ever 
present  temptation  to  incur  demand  liabilities  resting  upon 
inadequate  cash  reserves,  and  this  constituted  an  element  of 
danger  in  the  financial  situation,  upon  which  public  attention 
was  at  once  focused  when  the  first  symptoms  of  panic  were 
shown  in  October,  1907. 

The  inherent  danger  of  the  trust  company  aiming  to  do  a 
trust  business  and  a  banking  business  simultaneously  was 
shown  by  the  sudden  failure  of  the  Knickerbocker  Trust 
Company,  which  had  17,000  demand  deposit  accounts.  This 
failure  started  the  panic  in  New  York,  for  which  there  was 
plenty  of  inflammable  material.  The  demonstration  of  the 
weakness  of  trust-company  banking  made  so  great  an  im- 
pression on  the  public  mind  that  Governor  Hughes  appointed 
a  commission,  with  A.  B.  Hepburn,  ex-comptroller  of  the 
currency,  at  its  head,  to  investigate  and  report  upon  the 
subject,  with  a  view  to  remedial  legislation.     In  pursuance 

of  the  report  of  this  commission  the  Legisla- 
New  York  state     ^^^.^  passed  a  law  requiring  trust  companies 

in  the  borough  of  Manhattan,  New  York  City, 
to  keep  a  cash  reserve  of  15  per  cent  against  all  deposits 
payable  on  demand,  or  at  less  than  thirty  days'  notice, 
except   such   as   are   secured   by  New  York  state  bonds. 


STATE  BANKS  AND  TRUST  COMPANIES  365 

This  reserve  must  consist  of  lawful  money  of  the  United 
States,  gold  certificates,  silver  certificates,  or  national  bank 
notes.  Trust  companies  in  other  boroughs  of  New  York  City 
may  keep  one-third  of  their  reserves  as  deposits  in  other 
banking  institutions  approved  by  the  superintendent  of  banks. 
Trust  companies  in  other  parts  of  the  state  may  keep  one-half 
of  their  reserves  as  deposits  in  other  banking  institutions  so 
approved.  Accordingly  there  is  no  legal  requirement  of  any 
cash  reserve  at  all  in  any  trust  company  in  New  York,  since 
the  reserve  may  consist  of  bank  notes,  or  New  York  state 
bonds,  or  partly  of  one  and  partly  of  the  other.  The  same 
rule  applies  to  state  banks,  except  that  those  in  the  borough 
of  Manhattan  must  keep  25  per  cent  of  reserves  ;  in  other 
boroughs  of  New  York  City,  20  per  cent,  and  elsewhere  15 
per  cent. 

This  condition  is  not  so  menacing  as  it  appears,  when  we 
reflect  that  the  enactment  of  a  minimum  cash  reserve  is  the 
exception  and  not  the  rule  in  the  bank  legislation  of  the 
world.  It  must  be  considered  indiscreet,  however,  for  if  it 
is  desirable  to  regulate  cash  reserves  by  law  they  should  at 
least  consist  of  cash.  National  bank  notes,  which  are  the 
debts  of  certain  banks,  are  in  turn  bottomed  on  the  debts  of 
the  government.  Thus  the  legal  reserves  of  New  York  trust 
companies  are  two  removes  distant  from  cash,  and  the  only 
reason  for  allowing  this  practice  is  that  it  saves 
Rese^rv^s!^^^^  the  trouble  of  sorting  and  separating  the  cur- 
rency that  comes  in  as  deposits.  But  it  checks 
the  wholesome  process  of  bank-note  redemption.  Trust  com- 
panies which  do  a  general  banking  business  ought  to  keep  the 
same  amount  and  kind  of  reserves  against  their  demand  lia- 
bilities, and  should  be  subject  to  the  same  laws,  as  other  banks. 

Eighteen  states  of  the  Union  require  no  cash  reserve  at  all 
for  their  banking  institutions.  They  leave  this  to  the  discre- 
tion of  the  bankers  themselves,  as  is  the  custom  in  nearly  all 


366  BANKING 

countries.    Of  the  states  that  fix  a  minimum  reserve  some 

require   that   it  shall   consist   of   "lawful   money";    others, 

"lawful  money  of  the   United   States";    others,   "money," 

"cash,"  "actual  cash,"  "cash  in  hand,"  and 
Bond  Reserves.  m    i  i 

"  available    funds.       Five    states   (California, 

Connecticut,  Minnesota,  New  York,  and  Pennsylvania) 
specify  national  bank  notes  as  lawful  reserves.  Several 
states  allow  a  portion  of  the  reserves  to  consist  of  bonds 
of  the  state  itself,  or  of  the  United  States.^ 

On  the  7th  of  January,  191 1,  the  insolvency  of  the  Carnegie 
Trust  Company  became  known,  and  that  institution  was 
closed  by  the  New  York  State  Superintendent  of  Banking. 
The  disturbance  did  not  spread,  but  it  led  the  responsible 
heads  of  some  of  the  large  financial  institutions  of  the  city 
to  take  steps  to  prevent  bad  banking  from  becoming  epi- 
demic.   The  clearing  house  committee,  at  the 

Trust  Companies    instance  of  Honorable  A.  B.  Hepburn,  took  the 

and  the  New  York  •     i         i         i 

Clearing  House,      matter  in  hand  and  recommended  that  all  trust 

companies  of  the  city  having  not  less  than 
$1,000,000  capital  each,  be  allowed  to  become  members  of 
the  clearing  house  on  condition  of  maintaining  a  cash  re- 
serve of  25  per  cent,  of  which  at  least  15  per  cent  should  be 
in  their  own  vaults  and  the  balance  on  deposit  in  banks 
which  keep  25  per  cent  reserve.  This  recommendation  was 
adopted  by  the  clearing  house  banks.  May  9,  191 1.  Six- 
teen trust  companies  immediately  availed  themselves  of  the 
opportunity  to  become  members. 

1  This  is  a  misuse  of  terms,  since  a  bank  reserve  signifies  something 
which  can  be  immediately  used  to  pay  the  demand  obligations  of  the 
bank.  Whole  days  have  passed  in  New  York  during  panics,  when  no 
bid  could  be  obtained  for  any  kind  of  bonds,  even  those  of  the  United 
States.  Therefore  a  law  authorizing  a  given  percentage  of  bank  reserves, 
to  be  held  in  any  securities  whatever,  is  a  reduction  of  the  reserve  itself 
by  that  percentage,  and  ought  to  be  so  expressed  in  the  law. 


STATE  BANKS  AND  TRUST  COMPANIES  36/ 

In  order  to  safeguard  banking  interests  more  perfectly  it 

was  decided  at  the  same  time  to  adopt  the  system  of  mutual 

bank  supervision  and  examination  which  the  clearing  house 

of  Chicago  put  in  force  after  the  failure  of  the 

E^m^L^?o°if  ^^'^^^^  ^^"^^  '^  ^^^^  ^^^y-  ^^^^"  ^^^  Chicago 
clearing  house,  in  order  to  avert  a  panic,  as- 
sumed the  liabilities  of  the  Walsh  banks,  they  virtually  insured 
the  community  against  future  bank  failures.  In  order  to  do 
so,  however,  they  deemed  it  necessary  to  know  the  con- 
dition of  each  and  every  bank  from  day  to  day.  Nearly  all 
bank  failures  are  caused  by  speculations  inside  the  bank, 
or  promoted  by  the  leading  officers,  or  by  loans  on  unsound 
security,  or  by  loans  to  particular  persons  contrary  to  law,  or 
in  excess  of  the  dictates  of  prudence.  These  errors  usually 
have  small  beginnings,  and  can  be  nipped  in  the  bud  if  dis- 
covered early.  They  are  easily  recognizable  by  an  examiner 
acquainted  with  local  conditions.  Usually  the  fact  that  such 
examinations  are  frequent  will  deter  the  banker  from  making 
bad  loans,  since  the  existence  of  unsound  paper  in  his  port- 
folio will  speedily  be  known  to  his  competitors  in  business 
and  he  will  be  discredited  accordingly.    This 

An  Important  Ad-  system  of  mutual  bank  examination  is  now  in 
vance  in  Banking  .  .         .       ^,  .  -m  m     i    1    1  • 

Science.  practical  operation  in  Chicago,  Philadelphia, 

St.  Louis,  San  Francisco,  Los  Angeles,  Kansas 
City,  Minneapolis,  St.  Paul,  and  St.  Joseph,  as  well  as  New 
York.  It  is  perhaps  the  most  important  advance  in  bank- 
ing science  that  has  taken  place  in  this  country  since  the 
passage  of  the  National  Banking  Act. 


RECAPITULATION 

State  banks  exist  and  transact  business  in  competition 
with  national  banks  in  all  parts  of  the  country,  but  are  pre- 
vented by  the  federal  tax  from  issuing  circulating  notes. 


368  BANKING 

The  cash  reserves  of  state  banks  are  usually  a  smaller  per- 
centage of  their  deposit  liabilities  than  those  of  national 
banks.  Some  of  them  are  allowed  to  use  the  bonds  of  the 
state  in  which  they  are  incorporated,  or  those  of  the  United 
States,  or  both,  as  a  part  of  their  cash  reserves.  The  use  of 
bonds  for  that  purpose  is  equivalent  to  a  reduction  of  the 
reserve  itself,  since  bonds  are  not  cash. 

Trust  companies,  incorporated  under  state  laws,  exist  and 
transact  business  in  competition  with  both  state  banks  and 
national  banks.  Originally  designed  to  administer  trusts, 
such  as  decedent  estates,  guardianships,  mortgages,  etc.,  of 
which  the  liabilities  are  payable  at  fixed  periods,  they  have 
gradually  entered  the  field  of  banking  and  incurred  large 
demand  liabilities  for  individual  deposits,  for  which  they 
allow  interest,  and  which  they  redeposit  in  national  banks. 
With  the  money  thus  attracted  from  depositors  they  make 
loans  on  collateral  security,  buy  commercial  paper,  and 
transact  a  general  banking  business ;  and  for  their  unused 
balances  receive  interest  from  the  regular  banks.  In  other 
words,  they  receive  interest  on  their  cash  reserves,  keeping 
no  cash  in  their  own  vaults  except  a  small  amount  of  till 
money.  Thus  they  have  a  manifest  advantage  over  the 
banks  and  have  grown  enormously  in  recent  years  at  the 
expense  of  the  banks,  but  at  the  risk  of  disaster  to  themselves 
and  to  the  community.  To  correct  this  growing  menace  legis- 
lation has  been  lately  invoked  and  laws  have  been  enacted 
(in  New  York)  requiring  trust  companies  to  keep  a  fixed  per- 
centage of  cash  reserve  in  their  own  vaults.  Banks  in  some 
cities,  where  the  competition  of  trust  companies  has  been 
severe,  have  organized,  under  state  laws,  trust  companies 
composed  of  their  own  shareholders,  as  an  annex  to  their 
own  business,  but  separately  managed  and  officered,  and  in 
these  annexes  they  pay  interest  on  deposits  and  safeguard 
the  business  which  mii2:ht  otherwise  be  taken  from  them. 


CHAPTER  XVI 
FOREIGN   BANKING   SYSTEMS 

THE   BANK   OF   ENGLAND 

In  order  to  obtain  money  to  carry  on  a  war  in  which  the 
fate  of  the  dynasty  and  of  the  Protestant  religion  was  sup- 
posed to  be   involved,   Parliament    in   1694  passed   an  act 

creating  a  corporation  for  ten  years,  to  be 
Bank  of  England.  or  j  ^ 

called    the    Governor    and    Company   of   the 

Bank  of  England.      On  condition  that  the  said  corporation 

should  lend  to  the  government  at  once  the  sum  of  ;^i,2oo,- 

000  the  government  was  to  pay  8   per  cent   interest,  plus 

;{^4ooo  per  year  for  expenses,  —  a  rate  much  less  than  the 

treasury   had   been    accustomed  to  pay.      The   bank  was 

empowered  by  its  charter  to  deal  in  bills  of  exchange,  to 

buy  or  sell  coin  and  bullion,  to  lend  money  on  the  security 

of  goods,  wares,  and  merchandise,  and  to  sell  such  goods 

if  the  loan  was  not  repaid.     It  was  not  permitted  to  incur 

debt  exceeding  ;^i, 2 00,000  or  to  deal  in  goods,  wares,  or 

merchandise  except  as  above  stated. 

The  subscription  to  the  capital  was  completed  within  ten 

days  after  the  books  were  opened,  and  with  the  money  thus 

obtained  the  war  was  brought  to^a  successful  termination. 

The  scheme  was  well  conceived ;  for  it  established  a  credit 

by  means  of  which  the  wealth  of  the  commu- 

b'!!.^!!fl^i  nity  could  be  mobilized  for  the  use  of  the 

Beginning.  J 

army.  The  bank  advanced  its  capital  to  the 
government,  but  recovered  it  presently  by  issuing  an  equal 
amount  of  its  own  notes,  which  the  public  accepted  at  par 

369 


370  BANKING 

because  they  had  confidence  in  the  bank.  The  notes  of  the 
bank  were  to  pass  by  indorsement,  were  payable  at  such 
times  as  the  bank  might  determine,  and  were  not  legal 
tender.  An  amendment  to  the  charter  passed  in  1697,  pro- 
viding for  an  increase  of  the  capital  stock  by  ;^i,ooi,i7i, 
authorized  the  issue  of  notes  to  the  same  amount,  payable 
to  bearer  on  demand,  and  required  that  they  should  have  a 
mark  to  distinguish  them  from  the  earlier  issue.  The  first 
notes  issued  were  post  notes  drawing  interest.  The  next 
batch  (those  of  1697)  were  demand  notes  drawing  no  inter- 
est. The  people  accepted  them  at  par,  and  the  bank  again 
loaned  an  equivalent  amount  of  specie  to  the  treasury. 

In  1709  Parliament  granted  a  quasi  monopoly  to  the  bank 

by  a  provision   that   no   other  corporation  and  no  private 

partnership  composed   of   more   than    six   persons    should 

exercise  the  right  of  issuing  circulating  notes, 

NoTeTsues!  "  ^^   ^^^^  P^^^  ^^    ^^^^^  Britain  called    Eng- 

land." This  was  reenacted  in  1742,  with  the 
added  provision  that  the  said  Governor  and  Company  of 
the  Bank  of  England  were  thereby  "  declared  to  be  and 
remain  a  corporation  with-  the  privilege  of  exclusive  bankifig 
as  before  recited^  The  terms  used  show  that  in  common 
acceptation  the  word  "banking"  was  inseparable  from  the 
issue  of  circulating  notes  ;  and,  in  fact,  for  more  than  a 
hundred  years  everybody  understood  that  fhis  was  a  pro- 
hibition against  deposit  banking,  as  well  as  against  note 
issues,  by  stock  companies. 

The  charter  was  renewed  from  time  to  time,  on  varying 
conditions,  usually  on  the  condition  of  fresh  loans  to  the 

government  or  a  reduction  of  the  rate  of  inter- 
The  Restriction.  n     ,  , 

est  on  former  ones.     It  passed  through  many 

vicissitudes,  the  most  important  of  which  was  the  suspen- 
sion of  specie  payments  for  a  period  of  twenty-four  years, 
■'^rom    1797   to   182 1.     This   suspension    of   cash  payments 


FOREIGN   BANKING   SYSTEMS  371 

is  commonly  called  the  "  Bank  of  England  Restriction," 
because  the  bank  was  restricted,  first  by  the  Privy  Council, 
and  afterwards  by  Parliament,  from  paying  specie  for  its 
obligations.  The  suspension  was  not  due  to  commercial 
causes  but  to  ihe  large  subsidies  advanced  by  the  bank,  and 
paid  by  the  government  to  continental  powers,  for  carrying 
on  the  war  against  revolutionary  France. 

Until  1829  bank  notes  of  the  denomination  of  £1  were 
in  common  use  in  all  parts  of  the  United  Kingdom.  In 
consequence  of  the  panic  of  1825,  which  was  attributed  to 
excessive  issues  of  bank  notes,  an  act  was  passed,  and  is 
still  in  force,  prohibiting  the  issue  of  notes  in  England 
smaller  than  ;^5.  It  did  not  apply  to  Scotland  or  Ireland. 
The  intention  and  effect  of  this  act  were  to  saturate  the 
currency  with  a  larger  infusion  of  gold.  This  gave  greater 
stability  to  commerce  but  also  entailed  loss  resulting  from 
the  abrasion  of  coin,  which  has  been  and  is  still  a  source  of 
anxiety  to  English  statesmen  and  financiers.^ 

In  1833  Parliament  passed  an  act  making  the  notes  of 
the  Bank  of  England,  so  long  as  they  are  redeemed  in  gold 
on  demand,  legal  tender  at  all  places  in  England  and  Wales 
except  at  the  bank  itself. 

Not  until  the  year  1844  was  any  novelty  introduced  into 

the  bank's  methods  of  business.     At  that  time  the  opinion 

prevailed  generally  that  commercial  crises  were  caused  by 

excessive  issues  of  bank  notes.     The  exclusive  right  of  issue 

granted  to  the  bank  in  1700  and  1742  had 
Sir  Robert  Peel.  . 

been  so  far  relaxed  in  1826  that  joint  stock 

banks  were  allowed  to  issue  notes  at  a  distance  of  sixty-five 
miles  from  London ;  and  seventy-two  such  banks  had  been 
established.  England  had  been  afflicted  with  commercial 
crises  in  1825,  1836,  and  1839.  These  were  ascribed  to  over- 
issues of  bank  paper.     Sir  Robert  Peel,  the  prime  minister, 

1  See  page  24. 


3/2  BANKING 

was  of  the  opinion  that  bank  notes  ought  to  be  kept 
under  rigid  limitations,  although  book  credits  in  the  form  of 
deposits  might  be  safely  left  to  the  discretion  of  the  banker. 
At  his  instance  the  charter  of  the  bank  (which  was  about 
expiring)  was  amended  in  the  following  manner  :  The  issue 
department  was  to  be  wholly  separate  from  the  banking 
department.  The  sum  of  ;^i 4,000,000  of  securities,  includ- 
ing the  government's  debt  to  the  bank,  was  to  be  transferred 

to  the  issue  department,  which  should  there- 
The  Act  of  1844.  .      ,      ,  .         , 

upon    turn   over  to  the   bankmg   department 

;£"i  4,000,000  of  notes.  This  was  the  average  amount  of 
the  bank's  notes  then  outstanding.  Any  person  should  be 
entitled  to  receive  notes  from  the  issue  department  addi- 
tional to  the  aforesaid  sum,  in  exchange  for  gold  coin  or  for 
standard  gold  bullion  at  the  rate  of  £2,  i^js.  9^/.  per  ounce. 
Banks  and  banking  firms  having  the  right  to  issue  notes  at 
that  time  might  continue  to  issue  the  same  average  amount; 
but  if  any  should  cease  to  do  so,  the  Bank  of  England 
might  be  authorized  by  the  Privy  Council  to  issue  two-thirds 
of  the  amount  so  withdrawn,  by  adding  an  equivalent  sum  to 
the  government  securities  in  the  issue  department.  Under 
the  operation  of  this  clause  the  circulation  of  the  bank 
against  securities  has  been  raised  to  ;^i8,45o,45o. 

The  effect  of  the  act  of  1844  was  to  make  the  issue  of 
notes  automatic.  Nobody  has  any  discretion  as  to  the 
amount  of  notes  which  shall  be  in  existence  at  any  time. 
Setting  aside  the  fixed  sum  issued  against  securities,  the 
remainder  of  the  circulation  is  just  what  it  would  be  if  it 
were  composed  of  gold  exclusively.  The  additional  notes 
represent  merely  the  superior  convenience  of  paper  over 
coin  in  the  way  of  manipulation  and  carriage.  The  bank 
itself  cannot  get  notes  on  terms  different  from  those 
open  to  the  public.  To  get  fresh  supplies  it  must  take 
gold  out  of  the  banking  department  and  transfer  it  to  the 


FOREIGN   BANKING    SYSTEMS  373 

issue  department,  and  to  recover  the  gold  it  must  reverse 
the  process. 

The  restriction  put  upon  the  credit  circulation  in  England 
in  1844  was  coincident  with  a  great  increase  of  deposit 
banking,  and  it  produced  no  immediate  pinch.  As  popu- 
lation and  trade  enlarged,  more  media  of  exchange  were 
needed.  These  came  partly  in  the  form  of  gold  and  of 
notes  issued  for  gold,  but  chiefly  in  the  form  of  bank 
checks.  As  the  latter  were  the  creation  of  trade,  they  were 
always  commensurate  with  the  wants  of  trade  among  urban 
populations  and  in  places  where  banking  facilities  existed. 
It  was  an  advantage  also  that  they  were  available  in  sums 

smaller  than  ^5.  So  Peel's  Act  gave  general 
the  Bank  Act.       satisfaction.     Yet  it  has  been  the  object  of 

attack  by  some  of  the  foremost  English  econ- 
omists and  writers  on  banking.'^  No  other  economic  ques- 
tion, not  even  that  of  free  trade,  has  been  so  hotly  and 
persistently  debated.  The  opponents  of  the  act  contend  that 
it  prevents  the  bank  from  using  its  credit  in  the  only  mode 
available  for  quelling  panics,  —  that  is,  by  the  free  issue  of  a 
currency  that  everybody  will  accept.  They  point  to  numer- 
ous crises  prior  to  1844  where  the  bank  averted  disaster  by 
the  policy  of  expanding  its  note  issues.  They  point  to  three 
crises  since  1844,  —  those  of  1847,  1857,  and  1866,  —  in  each 
of  which  the  government  suspended  the  restrictive  clause  of 
the  act  and  authorized  the  bank  to  issue  notes  at  its  own 

1  For  an  argument  of  great  force  against  Peel's  Act,  see  that  of 
H.  D.  Macleod  in  the  History  of  Banking  in  All  Nations,  Vol.  II, 
pp.   173-183. 

John  Stuart  Mill,  when  called  as  a  witness  before  the  House  of 
Commons  Committee  in  the  crisis  of  1857,  said  tha|  he  was  against 
any  restrictions  by  law  of  the  issue  of  notes,  except  that  of  convertibility. 
He  was  in  favor  of  removing  the  restrictions  from  the  Bank  of  England 
and  from  all  other  banks.  —  Levi's  History  of  British  Commerce^ 
P-  399- 


374  BANKING 

discretion.^  In  all  these  instances  the  panic  subsided  as 
soon  as  it  was  known  that  notes  could  be  had  at  a  reason- 
able price.  Suspension  of  the  bank  act,  however,  did  not 
mean  suspension  of  specie  payments,  but  merely  that  the 
bank  might  issue  notes  at  its  own  risk  without  a  correspond- 
ing deposit  of  gold.  Whatever  notes  the  bank  puts  out  at 
any  time  it  must  redeem  in  gold  on  demand. 

Thus  the  opponents  of  the  act  contend  that  it  works  well 
only  in  fair  weather,  but  that  in  times  of  stress  and  danger  it 
prevents  the  use  of  an  adequate  existing  remedy,  —  namely, 
the  credit  of  the  Bank  of  England.     In  such  cases,  they  say, 

safety  can  be  found  only  by  annulling  the  act. 
pfo'atTc^n.''*'      ^^^  defenders  of  the   act  are   compelled  to 

admit  this;  but  they  maintain  that  the  restric- 
tion on  note  issues  tends  to  check,  although  it  does  not 
altogether  prevent,  the  speculations  which  lead  to  panics 
and  crises.  They  think  erroneously  that  notes  are  different 
from  other  forms  of  bank  credit  in  their  effect  upon  the 
prices  of  commodities  and  upon  the  foreign  exchanges,  and 
should  therefore  be  restrained  by  law,  even  though  they  are 
immediately  redeemable  in  gold.  This  was  the  main  con- 
tention of  Sir  Robert  Peel  when  he  brought  in  his  bill.  It 
was  repeated  by  Professor  Jevons  in  1875.^  Mr.  H.  D. 
Macleod  has  overthrown  the  argument  of  the  former,  in  so 
far  as  it  rests  upon  cited  instances  of  experience.^  The 
argument  of    the   latter  is   inconclusive,   to   say  the    least. 

1  In  1857  the  extra  notes,  if  issued,  were  to  be  loaned  at  not  less 
than  8  per  cent  interest  ;  in  1866  at  not  less  than  10  per  cent;  and  the 
interest  was  to  inure  to  the  benefit  of  the  government,  not  of  the  bank, 
so  that  the  public  should  not  seek  and  the  bank  should  not  issue  more 
notes  than  were  actually  necessary.  In  1847  and  in  1866  the  bank 
did  not  make  use  of  its  permission  to  issue  extra  notes,  but  the  panic 
ceased. 

2  Money  and  the  Mechanism  of  Exchange  (American  edition),  p.  314- 
8  Theory  and  Practice  of  Banking,  Vol.  II,  p.  150. 


FOREIGN    BANKING    SYSTEMS  375 

Yet,  whatever  the  statesman  of  the  present  day  might 
wisely  and  safely  do  if  he  had  a  tabula  rasa  on  which 
to  write  the  bank's  charter,  he  must  have  regard,  first  of 
all,  to  the  fact  that  British  commerce  and  British  modes 
of  thought  have  fashioned  themselves  upon  the  present 
system.  It  must  be  said  also  that  with  the  passage  of 
the  act  all  anxiety  respecting  the  goodness  of  the  circula- 
tion disappeared. 

Another  peculiarity  of   the   Bank   of   England   is   that  it 
holds  the  reserves  of  the  other  London  banks  and   prac- 
tically those   of    the  whole    United   Kingdom.     All   British 
banks,  including  those  of   Scotland  and  Ire- 

The  Bank  keeps     land,  keep  a  portion  of  their  reserves  in  Lon- 

the  Gold  Reserve 

of  the  Nation.        do^-     All  the  joint  Stock  and  private  banks 

of  London  deposit  in  the  Bank  of  England 
all  of  their  money  except  the  small  amount  needed  for  pay- 
ing over  the  counter.  It  is  more  convenient  for  them  to 
keep  it  in  the  vaults  of  the  bank  than  in  their  own.  Their 
reserves  range  from  10  to  15  per  cent  of  their  liabilities. 
The  bank,  in  order  to  make  a  profit  for  its  own  share- 
holders, lends  to  borrowers  about  60  per  cent  of  its 
deposits.  If  a  country  bank  keeps  one-half  of  its  reserve 
in  a  London  joint  stock  bank  and  the  latter  lends  85  per 
cent  of  this  to  its  customers,  while  the  Bank  of  England 
lends  60  per  cent  of  the  remaining  15  per  cent  to  its  cus- 
tomers, it  follows  that  only  6  per  cent  of  the  country  bank's 
deposit  in  the  city  bank  is  available  anywhere  in  the  form 
of  cash. 

Probably  the  ultimate  reserve  of  the  British  banks  reck- 
oned in  this  way  is  less  than  6  per  cent  of  their  demand 
liabilities.  The  remaining  94  per  cent  is  credit.  It  is  pos- 
sible to  transact  the  business  of  the  United  Kingdom  on  this 
small  percentage  of  cash  because  the  credit  of  the  Bank  of 
England  is  so  good.     Neither  the  great  bank  nor  the  lesser 


376  BANKING 

ones  are  required  by  law  to  keep  any  fixed  percentage  of 
reserve,  but  keep  such  proportion  as  experience  shows  to 
be  needful.  The  Bank  of  England  has  found  that  its  line 
of  safety  ranges  between  ^^  and  47  per  cent.  The  other 
London  banks  find  that  their  needs  are  much  less.^  The 
system  under  which  this  bank  among  many  has  become 
the  keeper  of  the  ultimate  reserve  of  all,  and  under  which  the 
amount  has  so  dwindled,  is  the  growth  of  centuries.  It  was 
never  invented  by  anybody,  and  if  it  did  not  now  exist 
would  be  pronounced  impossible.  When  the  bank  finds  its 
metallic  reserve  running  low  it  raises  the  rate  of  discount 
in  order  to  attract  gold  from  abroad.  It  sometimes  happens 
that  the  London  joint-stock  banks  continue  lending  at  the 
lower  rate  after  the  great  bank  has  raised  its  rate.  In  such 
cases  the  bank  sends  its  agent  into  the  street  and  borrows 
all  the  floating  money  that  can  be  found,  giving  consols  as 
security  therefor.  In  common  parlance  "  the  bank  borrows 
from  the  market,"  and  thus  creates  a  vacuum  which  can  be 
filled  only  by  money  from  foreign  countries. 

The  Bank  of  England  has  branches,  nine  in  number,  in 
the  principal  commercial  cities  of  England.  It  pays  to  the 
government  a  fixed  sum  for  the  privilege  of  note  issue,  and 
it  manages  the  public  debt  for  an  agreed  compensation.  It 
receives  all  the  collections  of  revenue  of  the  imperial  govern- 
ment in  England,  pays  the  interest  on  the  government's 
obligations,  and,  in  general,  performs  the  duties  which  in 
this  country  devolve  on  the  Treasurer  of  the  United  States. 
Although    it    performs    these    functions,    it    is    a    private 

1  Mr.  Goschen,  when  holding  the  office  of  chancellor  of  the  exchequer 
a  few  years  ago,  made  a  public  speech  at  Leeds,  arguing  that  the 
London  joint  stock  banks  ought  to  have  much  larger  reserves  than 
they  habitually  keep,  and  intimating  that  if  they  did  not  voluntarily 
adopt  that  policy  he  should  bring  before  Parliament  a  measure  to 
compel  them  to  do  so.  Not  one  of  them  ever  adopted  this  advice,  nor 
did  Mr.  Goschen  ever  bring  in  any  measure  to  compel  obedience  to  it. 


FOREIGN  BANKING   SYSTEMS  37/ 

corporation  managed  by  directors  chosen  by  the  share- 
holders. Its  public  duties  are  regulated  by  contract. 
Aside  from  these  duties,  the  government  has  no  more 
control  over  it  than  over  any  other  London  bank. 

The  following  statement  shows  the  condition  of  the  Bank 
of  England  on  April  8,  1908. 

Issue  Department 

Liabilities  Resources 

Notes  issued  .     .'      ;i^55,724,495        Government  debt        /"i  1,015,100 

Other  securities      .     .       7,434,900 
Gold  coin  and  bullion    37,274,495 


;^55»724495  ;^55.724,49S 

'    Banking  Department 

Liabilities  Resources 

Proprietors'  capital  ;^i4,553,ooo  Government securities;^i3, 757,493 

Rest 3,184,943  Other  securities      .     .  30,780,629 

Public  deposits    .     .     11,223,495  Notes 26,810,275 

Other  deposits     .     .     43,742,329  Gold  and  silver  coin  .  1,406,495 
Seven-day  and  other 

bills 5i»i25 


;^72,754,892  ;^72,754,892 

In  1844,  when  the  issue  department  was  separated  from 
the  banking  department,  the  government  owed  the  bank 
;^i  1,015,100.  This  debt  has  remained  unchanged  to  the 
present  time.  The  phrase  "  other  securities,"  where  it 
occurs  under  the  issue  department,  means  government 
securities  other  than  this  old  debt.  The  same  phrase, 
where  it  occurs  under  the  banking  department,  means  bills 
discounted  and  assets  other  than  government  securities. 
In  the  issue  department  notes  are  liabilities,  but  in  the 
banking  department  they  are  resources  because  they  are 
certificates  for  gold  deposited  in  the  issue  department. 
In  the  foregoing  statement  the  reserve  is  51  per  cent  of 
the  liabilities  to  the  public. 


3/8  BANKING 

Points  of  similarity  and  of  difference  between  the  English 
bank-note  system  and  our  own  may  be  here  noted : 

English  American 

An  arbitrary  amount  of  notes  All  bank  notes  issued  against 

issued  against  government  securi-  government  securities  in  the  cus- 

ties  in  the  custody  of  the  bank ;  tody  of  the  Treasury  ;    no  notes 

no  notes  smaller  than  ;^5.  smaller  than  ^5.00. 

Bank  notes  in  addition  to  the  Gold  certificates  issued  by  the 

foregoing     issued     in     unlimited  Treasury  in  unlimited  amounts  on 

amounts  on  the  deposit  of  gold  the  deposit   of   gold   coin;    none 

coin  or  bullion.  smaller  than  ^20. 

THE    SCOTCH   BANK   SYSTEM 

The  monopoly  of  banking  which  existed  in  England  from 
1709  to  1826  did  not  prevail  in  Scotland.  In  the  latter 
country  there  was  room  for  a  development  unrestrained  by 
legal  enactment,  and  this  freedom  led  to  interesting  results. 
The  Bank  of  Scotland  was  chartered  in  1695 
Bank^^°**^^  with  unlimited  powers  of  note  issue  and  with 

monopoly  privileges  for  twenty-one  years. 
When  the  monopoly  expired  in  1727,  it  was  not  renewed,  but 
the  bank  continued  to  exist.  In  that  year  the  Royal  Bank 
was  chartered.  This  institution,  finding  a  scarcity  of  com- 
mercial paper  in  the  market,  devised  a  new  method  of  using 
its  unemployed  capital,  known  as  the  system  of  cash  credits, 
which  forms  a  peculiar  feature  of  Scotch  banking. 

A  cash  credit  is  a  permission  extended  by  the  bank  to  a 
borrower  to  draw  money  as  it  is  wanted,  not  exceeding  a 
certain  sum,  paying  interest  for  the  time  and  amount  actu- 
ally used.     The  principal  difference  between  a  cash  credit 

and  an  ordinary  discount  is  that  the  former  is 

Cash  Credits.  ^     /  ,,         ^        •  ,  1 

"accommodation  paper,    — that  is,  not  based 

upon  any  completed  commercial  transaction.    For  this  reason 

personal  security,  in  addition  to  that  of  the  borrower,  is 


FOREIGN   BANKING   SYSTEMS  379 

required.  The  indorsers,  or  "cautioners,"  as  they  are 
termed  in  Scotch  law,  are  never  less  than  two  in  number 
and  frequently  three  or  more.  The  cautioner  has  the  right 
to  inspect  the  account  of  the  borrower  at  any  time,  and  to 
stop  the  credit  at  any  point,  if  he  wishes  to  terminate  his 
liability  there.  Cash  credits  are  based  upon  knowledge  of 
the  character  of  the  borrower  and  of  the  responsibility  of  the 
cautioners.  By  means  of  cash  credits  young  men  of  enter- 
prise and  integrity  are  enabled  to  make  a  start  in  the  world 
without  waiting  to  accumulate  capital  from  their  own  earn- 
ings. Sometimes,  too,  a  business  opportunity  presents  itself 
which  a  man  would  not  undertake  unless  he  could  be  sure 
of  finding  a  certain  amount  of  money  before  its  completion. 
He  may  need  it  or  he  may  not.  A  cash  credit  enables  him 
to  go  forward  with  confidence.  If  he  needs  the  money  or 
some  part  of  it,  he  pays  interest  for  what  he  uses.  Other- 
wise he  pays  nothing.  Cash  credits  have  played  a  large 
part  in  the  development  of  agriculture  in  Scotland.  The 
money  advanced  to  farmers  is  not,  however,  loaned  on 
mortgage,  but  on  personal  security,  and  the  accounts  are 
not  allowed  to  stagnate.  As  a  corollary  to  the  system  of 
cash  credits,  the  Scotch  banks  pay  interest  on  the  time 
deposits  of  their  customers  and  thus  stimulate  among  the 
people  the  habit  of  saving. 

Another  peculiarity  of  Scotch  banking  is  its  remarkable 
development  of  the  branch  system  by  which  deposits  are 
secured  from  every  nook  and  corner  of  the  country  and  by 

which  capital  is  transferred  easily  and  quickly 
s^st^T"*^^  to  the  places  where  the  demand  for  it  is  greatest. 

There  are  twelve  banks  in  Scotland,  and  they 
have  1065  branches.  The  system  has  been  so  developed 
and  extended  that  banking  facilities  reach  every  town  and 
hamlet  in  the  land.  Whatever  assistance  banks  can  give  to 
industry  is  available  to  the  poor  and  to  the  rich  on  equal 


38o  BANKING 

terms.    In  no  other  country  has  the  principle  of  equality  in 

bank  favors  been  carried  further.     In  no  other  has  greater 

pains  been  taken  to  bring  them  to  the  poor  man's  door. 

Until  1845  there  was  no  legal  limitation  upon  the  note 

issues  of  Scotch  banks.     When  Peel's  Act  was  passed  in 

England,  as  described  above,  the   principles    embodied  in 

it  were  applied  to  Scotland  in  a  modified  form.     It  was 

enacted  that  each  bank  might  have  an  issue 
Note  Issues.  .  1  ,  r 

of  notes  equal  to  the  amount  of  notes  and 

coin  then  issued  and  held  by  it.    This  is  called  the  "fixed" 

circulation,  and  it  amounts  to  ^2,676,350.    For  any  additional 

notes  it  was  to  hold  an  equal  additional  amount  of  coin,  but 

it  was  not  required  that  this  coin  should  be  held  specially  for 

the  redemption  of  the  notes;  nor  was  there  any  provision 

for  ascertaining  whether  the  law  was  complied  with  in  this 

particular. 

Notes  are  issued  in  denominations  of  one  pound  and 
upward.  They  are  exchanged  daily  at  the  Edinburgh  clear- 
ing house,  and  settlements  are  made  between  banks  by  drafts 
on  London.  The  notes  remain  in  circulation  on  the  average 
eighteen  days  after  each  issue,  the  whole  circulation  being 
redeemed  twenty  times  each  year.  No  deposited  security 
for  bank  notes  has  ever  been  required  in  Scotland,  but  note 
holders  have  a  prior  lien  on  the  assets.  Moreover,  the  lia- 
bility of  shareholders  for  note  issues  is  unlimited.  For  these 
reasons  the  note  issues  of  insolvent  banks  in  Scotland  are 
always  accepted  at  par  by  the  other  banks  and  are  never 
depreciated.  There  have  been  only  three  bank  failures  of 
any  importance  in  Scotland  :  those  of  the  Ayr  Bank  in  1772, 
of  the  Western  Bank  in  1857,  and  of  the  City  of  Glasgow 
Bank  in  1878.  These  might  perhaps  have  been  prevented 
by  proper  public  examinations. 

Although  deposits  are  received  and  loans  are  made  at 
each  branch,  the  branches  pay  out  only  the  notes  of  the 


FOREIGN   BANKING   SYSTEMS 


381 


Economy  in  the 
Use  of  Gold. 


parent  bank,  which  are  redeemable  at  the  head  office.  So 
it  is  necessary  to  have  real  money  only  in  one  place,  instead 
of  in  perhaps  one  hundred  different  places. 
Thus  the  maximum  of  business  is  done  with 
the  minimum  of  gold,  which  is  the  raison  d^etre 
of  banking.  Credit  has  been  systematized  in  Scotland  to 
the  last  degree,  and  has  been  found  to  answer  all  purposes 
so  long  as  the  paper  sovereign  can  be  converted  into  the 
gold  sovereign,  at  a  convenient  commercial  center.  The  gold 
held  by  the  banks  is  usually  not  more  than  5  per  cent  of 
their  deposits,  yet  the  Scotch  banks  possess  the  undoubting 
confidence  of  the  people  whom  they  serve. 

The  notes  of  the  Bank  of  England  are  not  legal  tender  in 
Scotland.  There  is  no  legal-tender  paper  there,  nor  has 
the  want  of  it  ever  been  a  cause  of  complaint. 

In  1907  the  average  liabilities  and  resources  of  the  twelve 
banks  of  Scotland,  in  thousands  of  pounds,  were  as  follows: 


Liabilities 
Capital  paid  .  . 
Surplus  .... 
Circulating  notes 
Deposits  .  .  . 
Acceptances  .  . 
Other  liabilities    . 


;^9,l66 

7,557 
6,776 
109,208 
4,832 
1,337 

;^I38,876 


Resources 
Loans  and  discounts    ;^7  2,069 

Government  securities  4,938 

Other  securities      .     .  21,644 

Specie 5,5i9 

Call  money    ....  25,470 

Acceptances  ....  4,832 

Other  assets  ....  4,404 


;^  1 38,876 


THE   CANADIAN  BANK  SYSTEM 

In  Canada  there  are  twenty-nine  banks,  with  capitals  rang- 
ing from  $14,400,000  and  surplus  $12,000,000  (the  Bank  of 
Montreal)  to  $301,300  (the  Weyburn  Bank). 
No  new  bank  can  be  established  with  less  than 
$500,000  subscribed,  of  which  at  least  $250,000 
must  be  paid  before  beginning  business.  All  of  the  larger 
banks  have  branches,  of  which  there  are  1841  in  the  Dominion, 


Canadian  Bank 
System. 


382  BANKING 

and  48  in  other  countries.  Each  bank  is  allowed  to  issue 
notes  to  an  amount  equal  to  its  paid  capital,  but  competition 
and  the  prompt  return  of  the  notes  for  redemption  have  al- 
ways kept  the  circulation  below  the  authorized  amount.  It 
ranges  between  40  and  50  per  cent  of  their  capital  and  sur- 
plus. All  banks  are  required  by  law  to  make  arrangements 
to  insure  the  par  value  of  their  circulation  in  any  and  every 
part  of  Canada,  and  for  this  purpose  to  establish  redemption 
agencies  at  the  chief  city  of  each  of  the  seven  provinces  and 
at  such  other  places  as  may  be  determined  by  the  treasury 
board.  In  practice  the  notes  of  the  different 
banks  are  exchanged  daily  at  the  clearing 
houses  in  the  larger  cities.  At  other  places  they  are 
exchanged  between  the  nearest  branches,  and  balances  are 
paid  either  in  Dominion  notes  or  by  drafts  on  the  commercial 
centers.  The  notes  remain  in  circulation  on  the  average 
thirty  days  after  each  issue,  the  whole  circulation  being 
redeemed  twelve  times  each  year. 

Nor  is  there  any  discount  on  the  notes  of  failed  banks. 
The  law  provides  for  the  protection  of  note  holders  (i)  by 
giving  them  a  prior  lien  on  all  the  assets  of  failed  banks,  in- 
cluding a  liability  on  the  part  of  shareholders  of  double  the 
amount  invested  by  them ;  (2)  by  a  bank  circulation  redemp- 
tion fund  contributed  by  all  the  banks,  equal  to  5  per  cent 
of  the  average  circulation  of  each;  and  (3)  by  a  provision 
that  the  notes  of  failed  banks  shall  draw  5  per  cent  interest 
from  the  time  of  default  till  public  announcement  is  made 
of  readiness  to  redeem  them.  There  have  been  three  bank 
failures  since  1890,  when  these  provisions  of  law  took  effect, 
but  the  note  holders  lost  nothing;  nor  did  the  other  banks 
lose  anything  from  the  common  redemption  fund. 

This  fund  was  established  by  Parliament,  at  the  instance 
of  the  bankers  themselves.  The  law  called  for  a  contri- 
bution from  each  bank  equal  to  i  per  cent  per  annum  of 


FOREIGN  BANKING   SYSTEMS  383 

its  circulation  until  the  total  amount  should  be  equal  to 
5  per  cent  thereof.  It  is  in  the  custody  of  the  Minister  of 
Finance.  It  is  invested  in  Dominion  securities  at  3  per 
cent,  and  the  interest  is  paid  to  the  contrib- 
uting banks.  In  case  of  the  failure  of  a  bank 
its  notes  are  redeemed  out  of  this  fund,  and  then  the  amount 
so  expended  is  restored  to  the  fund  (with  interest  at  3  per 
cent)  from  the  assets  of  the  failed  bank  before  any  other 
claims  are  paid.  The  banks  may  be  called  upon  for  addi- 
tional contributions  if  needed,  in  order  to  keep  the  fund  up 
to  5  per  cent  of  the  outstanding  circulation,  but  the  rate  of 
contribution  is  not  to  exceed  i  per  cent  per  annum. 

The  Canadian  system  of  note  issues  is  based  upon  the 

"banking   principle."     It  supplies   an  "elastic"  currency, 

expanding   and   contracting  with   the  variation   of   seasons 

and  the  wants  of  trade.     Its  system  of  branches  tends  to 

equalize  the  rates  of  interest  in  different  parts 

Branch  Banks.  r     ,       ^        -    -  »    1        1  1 

of  the  Dommion.     A  bank  receivmg  deposits 

in  Halifax,  Montreal,  and  Toronto  may  lend  them  the  follow- 
ing day  through  its  branches,  and  by  the  issue  of  its  own 
notes,  at  Winnipeg,  Vancouver,  and  Victoria,  the  branches 
redeeming  the  notes  by  drafts  on  the  head  office  when  they 
are  presented  for  that  purpose.  The  rate  of  interest  in  the 
smaller  towns  of  the  West  is  only  i  or  2  per  cent  higher 
than  in  the  large  cities  of  the  East  on  the  same  kind  of  loans. 
To  this  equalization  of  the  rate  of  interest  both  the  branch 
system  and  the  freedom  of  note  issue  contribute. 

Under  the  Canadian  law  a  bank  may  suspend  payments 
for  ninety  days  without  going  into  liquidation  ;  but  it  must 
not,  in  that  interval,  issue  notes  in  payment  of  deposits, 
since  that  would  increase  the  prior  lien  on  the  assets  and 
the  charge  upon  the  common  redemption  fund. 

The  weak  point  of  the  Canadian  system,  as  of  the  Scotch, 
is  the   lack  of   government  inspection.     The    Minister  of 


384  BANKING 

Finance  can  call  for  a  report  of  the  condition  of  a  bank  at 
any  time,  but  there   is  nothing  which  corresponds   to  our 

system  of  bank  examination.  In  default  of 
to^spection!  ^^^^  ^^^  bankers  have  procured  for  their  own 

chartered  association  legal  powers  of  super- 
vision over  the  making  of  circulating  notes  and  the  delivery 
thereof  to  the  banks,  the  disposition  made  by  the  banks  of 
such  notes,  and  penalties  for  the  breach  or  non-observance 
of  the  regulations  applicable  thereto.  Thus  the  banks  have 
the  legal  right  to  inspect  each  other  so  far  as  their  note 
circulation  is  concerned,  but  in  no  other  particular. 

The  Canadian  banks  are  not  allowed  to  issue  notes  smaller 
than  $5:00.  The  Dominion  government,  however,  has  legal- 
tender  notes  outstanding,  varying  in  amount  and  denomi- 
nations, against  which  there  is  a  gold  reserve  of  25  per 
cent  for  the  first  $30,000,000  and  100  per  cent  for  all  above 
that  sum.  Canadian  banks  are  required  by  law  to  keep  40 
per  cent  of  their  cash  reserves  in  Dominion  notes,  but  this 
law,  formerly  obligatory,  is  now  practically  of  no  consequence, 
since  the  banks,  as  a  matter  of  convenience,  hold  much  more 
than  40  per  cent  of  their  reserves  in  that  form. 

There  was  no  bank  suspension  in  Canada  during  the 
commercial  crisis  of  1907.  The  government  offered  to  loan 
the  banks  $10,000,000  at  5  per  cent  interest  for  sixty  days 
as  a  help  to  the  movement  of  the  crops,  on  collateral  to  be 
approved  and  guaranteed  by  the  Bank  of  Montreal,  but  only 
about  one-half  of  the  amount  was  accepted,  and  this  has 
since  been  repaid.  In  order  to  avoid  the  necessity  of  resort- 
ing to  this  expedient  hereafter,  an  amendment  to  the  bank- 
ing law  has  been  enacted  by  the  Dominion  Parliament, 
providing  that  during  the  crop-moving  season  (October  i  to 
January  31)  the  banks  may  issue  notes  to  the  amount  of  15 
per  cent  of  their  combined  capital  and  surplus,  in  addition 
to  the  amount  outstanding  at  the  beginning  of  the  season. 


FOREIGN  BANKING  SYSTEMS 


385 


The  twenty-nine  Canadian  banks  have  a  paid  capital 
of  $100,648,717  and  a  rest,  or  surplus,  of  $85,213,740,  and 
their  circulation  on  April  30,  191 1,  was  $83,647,088. 

The  chief  points  of  similarity  and  of  difference  between 
the  Canadian  system  and  our  own  are  these : 


Canadian 
Bank  notes  are  secured  by  a 
prior  lien  on  assets  including 
shareholders'  double  liability,  and 
by  a  common  safety  fund  equal 
to  5  per  cent  of  total  circulation. 
Failed  bank  notes  draw  interest  at 
5  per  cent. 

Banks  are  required  to  redeem 
their  notes  at  the  capital  of  each 
province  and  to  keep  them  at  par 
everywhere. 

Banks  are  allowed  to  have 
branches  in  all  parts  of  the 
Dominion. 


American 
Bank  notes  are  secured  by  gov- 
ernment bonds  and  by  a  5  per  cent 
redemption  fund  in  the  Treasury, 
and  by  the  government's  promise 
to  redeem  at  once  without  waiting 
to  sell  the  securities. 

Banks  are  required  to  receive 
each  other's  notes  at  par  in  all 
payments  to  themselves,  and  to 
redeem  their  own  notes  at  their 
counters  and  at  Washington  City. 

Branch  banks  not  permitted 
under  the  national  bank  system, 
but  any  state  bank  having  branches 
and  entering  the  national  system 
may  retain  such  branches. 


THE   BANK   OF   FRANCE 

The  Bank  of  France  was  founded,  with  a  capital  of 
30,000,000  francs,  in  the  year  1800,  at  the  instance  of 
Napoleon  Bonaparte,  then  first  consul.  It  was  an  ordi- 
nary bank  of  discount,  deposit  and  note  issue,  like  the  first 

and  second  banks  of  the  United  States,  which 
pf^fe^"^  °*         character  it  still  retains  ;  but  the  government 

has  never  been  a  shareholder  in  it.  It  was 
placed  under  the  management  of  fifteen  regents  and  three 
inspectors,  called  "censors,"  chosen  by  the  shareholders.  In 
1803  the  exclusive  right  of  note  issue  in  the  city  of  Paris 


386  BANKING 

was  conferred  upon  it.  In  1806  a  law  was  passed  provid- 
ing that  the  chief  of  the  state  should  appoint  from  among 
the  shareholders  a  governor  and  two  deputy  governors  of 
the  bank.  Under  the  present  law  the  governor  must  be  the 
owner  of  one  hundred  shares  of  1000  francs  each,  and 
each  deputy  governor  must  hold  fifty  shares.  The  governor 
has  general  direction  of  the  affairs  of  the  bank,  presides  at 
all  meetings  of  the  regents,  and  may  veto  any  of  their  acts. 
No  paper  can  be  discounted  that  he  disapproves  of.  He 
also  appoints  all  the  employees.  This  feature  of  the  bank's 
organization  has  been  retained  under  all  changes  of  the 
government  of  France.  The  bank  performs  the  same 
duties  in  the  management  of  the  public  debt  that  the  Bank 
of  England  performs  in  that  country. 

In  1848  the  exclusive  right  of  note  issue  in  the  whole  of 
France  was  conferred  upon  the  bank,  but  it  was  required  to 
buy  the  other  note-issuing  banks,  which  it  did  by  increasing 
its  own  capital  stock  to  91,250,000  francs.  The  monopoly 
of  note  issue  was  bestowed  upon  the  bank  in 
order  to  give  greater  stability  to  the  paper 
currency,  and  it  had  that  effect.  The  goodness  of  the  notes 
of  the  Bank  of  France  is  never  questioned,  and  its  monopoly 
is  not  complained  of.  In  consideration  of  the  bank's  serv- 
ices to  the  state,  the  government  exacts  no  special  compen- 
sation for  the  right  of  note  issue,  but  requires  it  to  pay  the 
same  taxes  as  other  banks  are  liable  to  and  also  exacts 
a  small  stamp  duty  on  its  notes.  The  amount  of  notes 
issuable  is  fixed  by  law  from  time  to  time.  In  the  last 
act  (February  it,  1906)  the  maximum  sum  was  fixed  at 
5,800,000,000  francs.  The  legislative  body  usually  antici- 
pates the  demands  of  commerce  by  extending  the  limit 
before  the  maximum  is  reached.  The  restriction  upon  its 
issues  is,  therefore,  more  apparent  than  real.  The  Bank  of 
France  is  perhaps  the  most  notable  example  and  illustration 


FOREIGN   BANKING   SYSTEMS  387 

of  the  "  banking  principle  "  of  note  issues  that  the  world 

has  ever  seen. 

The  amount  of  the  bank's  uncovered  notes  is  relatively 

small.     On  April  9,  1908,  its  total  issue  was  4,869,281,000 

francs  and  its  specie  on  hand  3,678,546,000  francs.     About 

one-fourth  of  the  specie  consists  of  silver  five-franc  pieces, 

which  are  available  for  the  internal  traffic  of  the  country 

but  not  for  foreign  trade,  since  their  metallic 
Cash  Reserves. 

is  much   less  than   their  nominal  value.     As 

they  are  legal  tender,  the  bank  must  receive  them  as  the 
equivalent  of  gold,  but  it  may  also  pay  them  at  par  for  all 
claims  against  itself.  Accordingly,  when  depositors  want 
gold  for  exportation,  the  bank  is  enabled  to  charge  a  pre- 
mium for  it,  the  alternative  being  payment  in  silver.  This 
premium  is  a  source  of  profit  to  the  bank.  The  limit  to  the 
possible  premium  is  the  cost  of  collecting  gold  coins,  of 
which  there  is  always  a  large  amount  in  circulation,  and 
which  brokers  are  ready  to  supply  if  they  are  paid  for  their 
trouble.  Usually  the  bank  charges  no  premium,  but  at  times 
it  charges  a  fraction  less  than  the  cost  of  obtaining  gold 
from  brokers.  If  it  should  charge  more,  the  public  would 
sell  its  gold  to  brokers  and  deposit  only  silver  at  the  bank. 

Sometimes  we  hear  that  the  Bank  of  France  or  the  Impe- 
rial Bank  of  Germany  is  buying  gold  with  its  notes  and 
allowing  the  importer  of  the  metal  interest  during  the  time 
of  transit  from  the  United  States.  This  can  be  done  with- 
out loss  whenever  there  is  a  fresh  demand  for  its  notes,  pro- 
vided the  demand  keeps  the  notes  in  circulation  during  the 
time  the  gold  is  in  transit.  Of  the  probable  duration  and 
extent  of  this  demand  the  bank  is  well  able  to  judge  through 
the  knowledge,  which  it  derives  from  its  branches,  of  the 
internal  trade  of  the  country. 

In  the  revolution  of  1848  the  bank  suspended  specie  pay- 
ments, and  its  notes  were  made   legal  tender,  but  it  was 


388  BANKING 

prepared  to  resume  at  the  end  of  three  months.  The  govern- 
ment, however,  prevented  it  from  doing  so  until  August, 
1850,  at  which  time  resumption  took  place  and  the  legal- 
tender  act  was  repealed.  The  bank  suspended  again  in 
1870,  at  the  beginning  of  the  Franco-German 
Spec'eTyments.  w^^'  ^"^  ^^^  ^^^^^  were  again  made  legal 
tender.  The  bank  at  that  time  held  specie 
nearly  equal  in  amount  to  its  outstanding  notes,  and  equal 
to  about  75  per  cent  of  all  its  demand  liabilities  ;  and  its 
officers  were  prepared  to  meet  a  run,  besides  making  the 
usual  advances  to  the  mercantile  community  and  the  unusual 
ones  which,  it  was  foreseen,  would  be  required  by  the  gov- 
ernment. Rumors  haci,  however,  gained  credence  that  specie 
was  flowing  out  of  the  country  in  large  amounts  to  Prussia, 
and  so  public  opinion  demanded  that  the  bank  should  stop 
payments  and  that  its  notes  should  be  made  legal  tender. 
On  August  12,  1870,  a  law  was  passed  to  that  effect.  The 
same  act  limited  the  note  issues  to  1,800,000,000  francs. 
Two  days  later  the  limit  was  raised  to  2,400,000,000  francs, 
and  by  subsequent  steps  to  3,200,000,000  francs  in  July, 
1872.  The  bank  advanced  to  the  government  during  the 
war  with  Germany  and  the  later  conflict  with  the  commune 
761,000,000  francs,  and  continued  to  make  advances  while 
the  new  republic  was  establishing  itself,  until  they  reached 
the  maximum  sum  of  1,530,000,000  francs.  About  one-half 
of  the  sum  thus  advanced  was  specie.  The  premium  on 
specie  at  any  time  was,  however,  slight.  Once  it  was  as  high 
as  4  per  cent,  but  only  for  a  short  time.  After  the  sup- 
pression of  the  commune  it  fell  to  i  per  cent. 

While  Paris  was  besieged  the  parent  bank  could  do  nothing 
to  assist  the  government,  but  the  branches  were  able  to  do  so. 
The  Morgan  loan  of  October,  1870,  for  250,000,000  francs  was 
guaranteed  by  the  Bank  of  France.  Specie  payments  were 
resumed  on  January  1,1878,  but  the  legal-tender  quality  of  the 


FOREIGN  BANKING  SYSTEMS 


389 


notes  of  the  bank  was  not  repealed.  It  was  retained  at  the 
instance  of  the  business  community  outside  of  Paris,  as  a 
matter  of  convenience  in  the  handling  and  transfer  of  money. 

The  Bank  of  France  is  required  by  law  to  have  at  least 
one  branch  in  each  department  of  France.  It  has  also  a 
large  number  of  subsidiary  offices  in  places  too  small  to 
support  a  branch  with  the  usual  complement  of  officers  and 
employees.  The  rate  of  discount  is  uniform 
Discmmts^^^  at  the  parent  bank  and  at  all  branches  and 
offices.  During  recent  years  it  has  been 
usually  2^  to  4  per  cent,  and  is  less  fluctuating  than  in 
any  other  country.  No  paper  is  rejected  on  account  of  its 
smallness.  In  1889  there  were  at  the  parent  bank  nearly 
20,000  discounts  of  10  francs  ($1.93)  or  less  each,  and  more 
than  1,000,000  ranging  in  size  from  51  to  100  francs. 

The  chief  points  of  difference  between  our  banking  system 
and  that  of  France,  as  regards  note  issues,  are  these : 


French 

One  bank  of  issue  with  numer- 
ous branches. 

Cash  reserve  fixed  by  the  bank. 

Notes  secured  by  the  bank's 
assets. 

Maximum  amount  of  notes 
fixed  by  law  from  time  to  time. 


American 

Any  number  of  banks  of  issue, 
no  branch  banks. 

Cash  reserve  fixed  by  law. 

Notes  secured  by  government 
bonds. 

Amount  of  notes  not  to  exceed 
the  bank's  paid  capital. 


The  following  is  a  condensed  statement  of  the  condition  of 
the  Bank  of  France  in  thousands  of  francs  on  April  9,  1908  : 

Liabilities 
Capital     .     .     , 
Surplus    .     .     . 
Circulating  notes 
Deposits  .     .     . 
Other  liabilities 


Francs 
182,500 

38,519 

4,869,281 

440,000 

375,243 


Resources  Francs 

Gold 2,776,033 

Silver 902,513 

Discounts 1,046,796 

Advances  on  securities  .     541,196 
Other  resources     .     .     .     639,005 


5»905,543 


5»905>543 


390  BANKING 

Although  the  Bank  of  France  has  a  monopoly  of  note 
issues,  it  has  numerous  competitors  in  the  field  of  deposit 
and  discount,  the  largest  being  the  Cre'dit  Lyonnais  with  a 
capital  of  250,000,000  and  a  surplus  of  125,000,000  francs. 
Five  such  banks  have  aggregate  deposits  of  3,424,000,000 
francs,  sevenfold  the  amount  of  the  deposits  of  the  Bank  of 
France.  The  deposits  are  exclusively  in  cash  or  bank  notes. 
Securities  cannot  be  converted  into  sight  deposits,  although 
the  bank  may  undertake  their  sale  and  conversion  into  cash 
for  the  depositors'  credit  when  sold.  These  five  banks  hold 
2,414,000,000  francs  of  short-time  commercial  paper,  and 
883,000,000  francs  of  advances  on  securities.  This  great 
development  of  discount  and  deposit  banking  in  France  has 
taken  place  mainly  during  the  past  twenty-five  years. 

THE  IMPERIAL  BANK  OF  GERMANY 

The  Reichsbank,  or  Imperial  Bank  of  Germany,  was 
grafted  upon  .jthe  stem  of  the  Bank  of  Prussia  in  the  year 
1875.  Prior  to  that  event  there  had  been  five  different 
monetary  systems   in  the  Germanic   confederation,   with   a 

heterogeneous  coinage,  a  variety  of  legal-tender 
orGerman^°^       notes  issued  by  the  several  governments,  and 

numerous  banks  whose  circulating  notes  were 
generally  at  a  discount  except  at  their  place  of  issue.  The 
establishment  of  a  central  bank  was  one  of  the  measures 
adapted  to  bring  order  out  of  this  financial  chaos,  and  it 
has  been  successful  even  beyond  the  expectations  of  its 
promoters.  The  Bank  of  Prussia  was  originally  owned  by 
the  government,  which  had  contributed  its  capital  of  2,000,- 
000  thalers,  but  it  had  grown  to  20,000,000  thalers  by 
the  admission  of  private  stockholders.  The  government, 
however,  continued  to  control  it.  The  German  Empire 
bought  the  Prussian  government's  interest,  raised  the  capi- 
tal to    120,000,000   marks,  and  disposed  of  the  whole  by 


FOREIGN   BANKING    SYSTEMS  39 1 

private  subscription,  —  retaining,  however,  absolute  control 

over  it  by  means  of  an  imperial  board  of  directors,  subject 

to  the  chancellor  of  the  empire.     By  the  bank  act  of  1875 

the  president  and  the  members  of  the  board  of  directors 

are  appointed  by  the  Kaiser  for  life,  on  the  recommendation 

of  the  federal  council.     The  officers  of  the  bank,  although 

paid  by  it,  are  considered  government  officials, 
Its  Organization.  ,      ,  ,,  .  ,     1  ,      , 

and  they  are  not   allowed   to  hold  shares  m 

the  bank.     The  shareholders  choose  from  their  own  number 

a  central  committee,  who  act  in  an  advisory  and  supervisory 

capacity,   but   receive   no    salary.     The    central    committee 

elects  three  members  from  its  own  number  to  sit  with  the 

imperial  board  of  directors   in   an  advisory   capacity,   and 

they  are  authorized  and  required  to  inspect  the  books  and 

accounts  of  the  bank  *'  in  the  presence  of  a  bank  director  " 

and  to  make  reports  thereupon  to  the  central  committee. 

At  the  time  when  the  bank  act  of  1875  ^^^  passed  there 

were  thirty-two  independent  banks  in  the  empire  which  had 

the  right  of  note  issue.     The  general  provisions  of  the  act 

applied  to  them  as  well  as  to  the  Reichsbank.     They  were 

allowed  to  issue  in  the  aggregate  1315,000,000 
Note  Issues.  «=<-'     <-'  »-'»^ 

marks  and  the  Reichsbank  250,000,000  marks 
of  uncovered  notes.  It  was  provided  also  that,  if  any  of  the 
independent  banks  should  for  any  reason  cease  to  issue 
notes,  their  rights  of  issue  should  pass  to  the  Reichsbank. 
All  but  seven  of  them  either  abjured  the  right  of  issue  or 
lost  it  by  expiration  of  their  charters  on  or  before  January  i, 
1894.  The  uncovered  issues  of  the  Reichsbank  have  since 
been  raised  to  550,000,000  marks,  which  is  called  the  "con- 
tingent circulation." 

Some  provisions  of  the  German  system  are  of  great 
importance,  and  should  be  compared  with  the  English 
system,  as  established  by  the  bank  act  of  1844.  The 
German   law,  like  the   English,  requires  that,  for  all  note 


392  BANKING 

issues  above  the  foregoing  limits,  the  banks  must  have  an 
equal  amount  of  cash  in  their  reserves,  but  it  does  not 
require  them  to  hold  this  cash  as  a  special  redemption 
fund  for  the  notes.    Nor  is  the  regulation  an  inflexible  one, 

like  that  of  the  English  act.  Any  bank  may 
Feature^*^^  exceed  the  limitation  of  the  cash  reserve  by 

paying  to  the  imperial  treasury  a  tax  of  5  per 
cent  on  the  surplus  issue,  provided  that  the  Reichsbank 
shall  maintain  at  all  times  a  reserve  equal  to  one-third  of  its 
notes  in  circulation  —  the  other  two-thirds  to  be  covered  by 
bills  or  checks  running  not  more  than  three  months  and  hav- 
ing at  least  two  indorsements  of  undoubted  responsibility. 
The  tax  was  originally  imposed  for  the  purpose  of  restricting 
the  note  issues,  but  experience  has  led  to  the  abandonment 
of  that  motive,  as  is  shown  by  the  fact  that  frequently  the 
rate  of  interest  charged  to  the  borrowers  is  less  than  the  tax. 
Each  note-issuing  bank  is  required  to  publish,  four  times  each 
month,  a  report  of  its  assets  and  liabilities,  showing  par- 
ticularly the  state  of  its  note  circulation  and  of  its  reserve 
fund.  If  the  note  issues  are  in  excess  of  the  limitations 
above  described,  the  tax  is  imposed  immediately,  and  is 
repeated  each  week  as  long  as  the  excess  continues.  Evi- 
dently this  system  of  note  issue  was  modeled  upon  the 
English  one,  but  modified  by  English  experience  in  the 
crises  of  1847,  1857,  and  1866,  when  it  was  found  neces- 
sary to  "  suspend  the  bank  act."  To  avoid  the  necessity 
of  breaking  the  law  on  such  occasions,  the  German  act 
was  made  flexible,  and  has  been  found  to  avert  trouble  in 
times  of  severe  stringency.  It  must,  therefore,  be  consid- 
ered preferable  to  the  English  act. 

Imperial  Bank  notes  are  now  legal  tender.  At  first  circu- 
lating notes  could  not  be  issued  smaller  than  100  marks 
($23.80),  but  notes  of  50  and  20  marks  have  since  been 
authorized.    The  Reichsbank  is  obliged  to  give  its  notes  in 


FOREIGN  BANKING  SYSTEMS  393 

exchange  for  gold  bullion,  and  to  redeem  them  in  gold 
coin.  Banks  may  count  the  notes  of  other  specie-paying 
banks  in  Germany  and  notes  of  the  imperial 
v^ionT^°"  treasury  as  a  part  of  their  cash  reserve.    The 

Reichsbank  has  hundreds  of  branches,  divided 
into  classes  according  to  the  importance  of  the  places  where 
they  are  situated  and  the  kind  of  business  transacted  by 
them.  The  rate  of  interest  is  uniform  at  the  head  office 
and  all  branches.  The  Reichsbank  usually  redeems  its  notes 
at  its  branches,  as  well  as  at  its  head  office  in  Berlin.  The 
independent  banks  are  required  to  redeem  their  notes  at 
an  agency  either  in  Berlin  or  in  Frankfort,  as  well  as  at 
their  own  counters.  All  note-issuing  banks  are  required  to 
receive,  in  payments  to  themselves,  the  notes  of  other 
banks,  and  must  at  once  present  them  (except  those  of  the 
Reichsbank)  for.  redemption,  or  use  them  in  payments  to 
the  issuing  bank,  or  in  other  payments  in  the  town  where 
it  is  situated. 

A  law  was  passed  in  1900  to  increase  the  capital  of  the 
Reichsbank  to  180,000,000  marks  by  the  sale  of  new  shares 
at  135,  the  premium  to  be  added  to  the  surplus  fund.  This 
increase  was  effected  in  1905. 

The  annual  profits  of  the  Reichsbank  are  apportioned  in 

the  following  manner:   (i)  3^  per  cent  on  the  capital  stock 

goes  to  the  shareholders ;   (2)  10  per  cent  of  the  excess  goes 

to  the  surplus  fund;   (3)  the  remaining  surplus  is  divided 

between  the  shareholders  and  the  imperial  treas- 
Dividends. 

ury  in  the  ratio  of  one-fourth  to  the  former  and 

three-fourths  to  the  latter.  If  the  net  profits  fall  short  of  3^ 
per  cent  on  the  capital  stock,  the  residue  is  to  be  taken  from 
the  surplus  fund.  Dividends  not  called  for  within  four  years 
after  maturity  are  to  be  canceled  in  favor  of  the  Bank. 

The  Imperial  Bank  is  required  to  take  charge  of  the  busi- 
ness of  the  imperial  treasury  without  compensation. 


394 


BANKING 


The  chief  points  of  difference  between  our  banking  system 
and  that  of  the  German  Reichsbank  are  these  : 


German 
Bank     controlled     by    govern- 
ment exclusively. 

Circulating  notes  secured  by 
bank's  assets. 

A  certain  amount  of  notes 
issuable  without  conditions. 

Issues  over  and  above  the  fore- 
going to  be  covered  by  an  equal 
reserve  of  cash,  otherwise  a  tax 
of  5  per  cent  on  the  excess. 


American 
Banks     controlled     by     share- 
holders exclusively. 

Circulating  notes  secured  by 
government  bonds. 

Amount  of  notes  not  to  exceed 
bank's  capital. 

Each  bank  to  keep  a  deposit 
in  the  treasury,  equal  to  5  per 
cent  of  its  circulating  notes,  for 
the  redemption  thereof. 


The  following  is 
tion  of  the  German 
May  I,  191 1  : 

Liabilities 
Capital 

Surplus     .     .      . 
Circulating  notes 
Deposits  .     .     . 
Other  liabilities 


a  condensed   statement   of  the  condi- 
Reichsbank  in  thousands  of  marks  on 


Marks  Resources  Marks 

180,000  Coin,i  bullion,  and  notes  1,208,712 

64,814  Bills  of  exchange  .  .  .  1,014,707 

1,659,092  Loans  on  securities  .  .     112,039 

602,785  Loans  on  goods     .  .  .         2,384 

24,855  Other  resources     .  .  .     193,704 

2,53i'546  2,531,546. 


1  The  first  item  of  the  resources  consists  of  gold,  818,106  marks; 
silver,  316,573  marks;  government  notes,  63,553  marks;  notes  of  other 
banks,  10,480  marks. 


FOREIGN   BANKING   SYSTEMS  395 

RECAPITULATION 

The  Bank  of  England  is  a  private  corporation  which  ren- 
ders certain  financial  services  to  the  government.  In  con- 
sideration of  a  loan  of  money  Parliament,  in  1694,  granted  it 
a  charter  with  banking  powers,  and  an  annual  payment  for 
interest  on  the  loan.  The  bank  paid  the  stipulated  sum  to 
the  government  and  issued  its  own  interest-bearing  notes 
for  an  equal  amount,  which  were  bought  by  the  public.  With 
the  capital  thus  replaced  it  began  the  business  of  discount 
and  deposit.  Three  years  later  the  bank  made  a  new  loan 
to  the  government  and  was  authorized  by  Parliament  to  issue 
demand  notes  payable  to  bearer  for  an  equal  amount.  These 
were  likewise  accepted  by  the  public  at  par.  In  1709  the 
government  virtually  granted  to  the  bank  the  exclusive 
privilege  of  note  issue  "  in  that  part  of  Great  Britain  called 
England."  From  that  time  the  indebtedness  of  the  gov- 
ernment to  the  bank,  and  also  the  amount  of  its  note  issues, 
increased  gradually  until  1797,  when  the  bank  was  forced  to 
suspend  specie  payments  on  account  of  its  large  advances  of 
money  to  the  treasury  for  war  purposes.  The  suspension 
continued  until  182 1.  In  1826  the  monopoly  of  the  bank 
was  relaxed,  and  the  privilege  of  note  issue  was  granted 
to  joint  stock  banks  at  a  distance  of  sixty-five  miles  from 
London.  There  were  severe  commercial  crises  in  England 
in  1825,  1836,  and  1839,  ^^^  ^^^  opinion  prevailed  that  they 
were  caused  by  excessive  issues  of  bank  notes.  This  belief 
led  to  the  passage  of  an  act  by  Parliament  in  1844,  at  the 
instance  of  Sir  Robert  Peel,  by  which  the  issue  of  notes  as 
credit  instruments  of  the  bank  was  forbidden.  By  the  terms 
of  this  act  the  function  of  note  issue  was  wholly  separated 
from  that  of  deposit  and  discount,  and  became  an  automatic 
exchange  of  notes  for  government  securities  or  for  gold. 
The  bank  was  allowed  to  transfer  to  the  issue  department  a 


39^  BANKING 

fixed  amount  of  such  securities  arid  to  receive  an  equal 
amount  of  notes.  In  addition  to  this  fixed  amount,  the 
issue  department  was  to  give  notes  in  exchange  for  gold  and 
not  otherwise,  and  was  to  redeem  all  notes  in  gold  on  demand. 
The  same  principle  was  applied  to  all  note-issuing  banks  in 
England.  When  the  note-issuing  privileges  of  any  country 
banks  should  lapse,  those  of  the  Bank  of  England  were  to 
be  increased,  on  condition  that  government  securities  of  equal 
amount  were  placed  in  the  issue  department.  In  practice 
this  system,  which  was  adopted  to  prevent  panics,  has  failed 
to  do  so,  and  it  has  been  found  necessary  in  times  of  great 
stringency  to  suspend  the  operation  of  the  act  and  to  allow 
the  bank  freedom  to  issue  notes  without  the  deposit  of  corre- 
sponding amounts  of  gold.  No  notes  can  be  issued  in  Eng- 
land or  Wales  smaller  than  ;^5.  The  notes  of  the  Bank  of 
England  are  legal  tender  at  all  places  in  England  and  Wales 
except  at  the  bank  itself. 

The  banks  of  Scotland  are  distinguished  by  the  great 
extension  and  perfection  of  their  branch  system  and  by  a 
kind  of  loans  known  as  cash  credits.  There  are  only  eleven 
banks  in  the  .country,  but  they  have  all  together  more  than 
one  thousand  branches.  Every  hamlet  in  the  country  has 
at  least  one  office  connected  with  a  bank  in  a  large  city.  At 
this  office,  or  branch,  deposits  are  received  and  loans  are 
made  with  the  same  facility  and  freedom,  and  on  substan- 
tially the  same  terms,  as  in  the  cities.  The  branches,  how- 
ever, pay  out  only  the  circulating  notes  of  the  bank,  which 
are  redeemable  at  the  head  office.  It  is  unnecessary,  there- 
fore, to  keep  gold  at  more  than  one  place.  A  cash  credit  is 
an  authorization  extended  to  a  borrower  to  draw  from  the 
bank,  within  a  certain  period  of  time,  a  certain  sum,  or  any 
part  thereof,  and  requiring  him  to  pay  interest  only  for  the 
amounts  drawn  and  for  the  time  they  are  kept.  Cash  credits 
are  loans  on  personal  security,  not  less  than  two  indorsers 


FOREIGN   BANKING   SYSTEMS  397 

being  required,  frequently  three  or  more.  Loans  of  this 
kind  to  farmers  are  common,  and  they  have  been  greatly 
conducive  to  the  agricultural  prosperity  of  the  country. 
Cash  credits  are  economical  to  the  borrower  because  he 
pays  nothing  for  his  right  to  draw  upon  the  bank  but  only 
for  what  he  actually  draws.  Interest  is  allowed  on  all 
deposits.  The  note  issues  of  the  Scotch  banks  are  regu- 
lated on  the  same  principles  as  those  of  the  Bank  of  Eng- 
land. Each  bank  is  allowed  to  issue  a  certain  amount  of 
notes  against  its  general  assets.  For  all  issues  above  that 
sum  it  must  have  a  gold  sovereign  for  each  paper  sovereign 
outstanding,  but  it  is  not  required,  as  the  Bank  of  England 
is,  to  keep  this  gold  separate  from  its  other  assets.  The  gold 
held  by  the  Scotch  banks  is  usually  not  more  than  5  per  cent 
of  their  deposits.  Each  bank  has  an  office  in  London  and  a 
balance  on  deposit  in  the  Bank  of  England.  The  Scotch 
banks  issue  notes  in  denominations  of  ^i  and  upward.  No 
bank  notes  are  legal  tender  in  Scotland.  There  is  no  system 
of  public  inspection  or  supervision  of  banks  in  Scotland. 

In  Canada  there  are  thirty-five  banks.  They  have  a  sys- 
tem of  branches  like  that  of  the  Scotch  banks,  but  their  note 
issues  are  regulated  on  a  different  plan.  They  are  allowed 
to  issue  notes  to  the  amount  of  their  paid  capital,  but  are 
required  to  make  arrangements  which  shall  keep  them  at 
par  in  all  parts  of  the  country,  and  to  this  end  they  must 
have  at  least  one  redemption  agency  in  each  province  of  the 
Dominion.  Each  bank  is  required  also  to  contribute  a  sum 
equal  to  5  per  cent  of  its  circulation  as  a  common  fund  to 
secure  the  prompt  redemption  of  the  notes  of  failed  banks. 
This  fund,  held  in  the  custody  of  the  Minister  of  Finance,  is 
invested  in  Dominion  securities  which  draw  interest  at  3  per 
cent,  and  the  interest  is  paid  to  the  banks  in  proportion  to 
their  contributions.  Note  holders  also  have  a  prior  lien  on 
the  assets  of  failed  banks,  including  the  double  liability  of 


398  BANKING 

the  shareholders.  The  notes  of  failed  banks  draw  interest 
at  5  per  cent.  The  safety  fund,  the  prior  lien,  and  the  inter- 
est clause  have  been  effectual  to  prevent  any  depreciation  of 
the  notes  of  failed  banks  in  Canada  since  those  provisions  of 
law  went  into  force.  There  is  no  government  inspection 
of  banks  in  Canada,  but  the  incorporated  association  of 
Canadian  bankers  is  empowered  by  law  to  inspect  the  note 
issues  of  all  banks  and  to  keep  them  within  the  limitations 
of  the  law,  with  power  to  punish  infractions. 

The  Bank  of  France  is  a  private  corporation  which  dis- 
charges public  functions  similar  to  those  performed  by  the 
Bank  of  England.  Its  affairs  are  managed  by  a  board  of 
regents  chosen  by  the  shareholders.  They  act,  however, 
under  the  general  direction  of  a  governor  chosen  from 
among  the  shareholders  by  the  chief  of  the  state.  The 
governor  has  power  to  veto  any  act  of  the  regents.  He 
also  appoints  all  employees  of  the  bank.  The  bank  has  the 
exclusive  right  of  note  issue  in  France,  and  its  notes  are 
legal  tender.  The  maximum  amount  of  its  issues  is  fixed  by 
law  from  time  to  time.  Its  metallic  reserve  is  not  regulated 
by  law,  but  is  usually  80  per  cent  or  more  of  its  note  circu- 
lation. In  specie  holdings  it  is  the  strongest  bank  in  the 
world.  The  government  does  not  exact  any  compensation 
from  the  bank  for  the  monopoly  of  note  issue,  but  it  imposes 
a  small  stamp  duty  on  the  notes.  The  bank  suspended 
specie  payments  in  1870,  during  the  Franco-German  war. 
The  suspension  was  prolonged,  at  the  instance  of  the  gov- 
ernment, till  1878,  but  the  discount  on  its  circulating  notes 
during  the  greater  part  of  this  time  was  so  small  as  to  be 
scarcely  noticed.  The  bank  has  a  large  number  of  branches 
and  subsidiary  offices  in  all  parts  of  France,  where  commer- 
cial paper  is  discounted  and  loans  are  made  on  securities. 
The  rate  of  interest  on  loans  is  uniform  at  the  parent  bank 
and  at  all  branches  and  offices.     In  its  system  of  note  issue 


FOREIGN   BANKING    SYSTEMS  399 

the  Bank  of  France  is  a  conspicuous  example  of  the  "  bank- 
ing principle,"  as  the  Bank  of  England  is  of  the  "  currency 
principle." 

The  Imperial  Bank  of  Germany  is  owned  wholly  by  private 
shareholders,  but  is  under  the  exclusive  control  of  the  gov- 
ernment. Its  board  of  directors  is  appointed  by  the  emperor, 
on  the  nomination  of  the  federal  council,  and  all  the  officers 
of  the  bank  are  considered  as  government  employees.  The 
directors  are  responsible  to  the  chancellor  of  the  empire.  A 
committee  of  the  shareholders  sits  with  the  board  of  directors 
in  an  advisory  capacity,  inspects  the  accounts  from  time  to 
time,  and  makes  reports  thereon  to  the  shareholders.  The 
bank  has  the  right  of  note  issue,  —  a  right  which  will  become 
exclusive  whenever  the  issues  of  certain  independent  banks 
shall  have  ceased.  The  method  of  note  issues  is  a  modifica- 
tion of  that  of  the  Bank  of  England.  The  bank  is  allowed  a 
fixed  amount  of  uncovered  notes.  For  all  above  that  sum  it 
must  have  in  its  reserves  an  equal  amount  of  cash,  but  this 
is  not,  like  the  English  law,  an  inflexible  rule.  The  bank 
may  issue  uncovered  notes  in  excess  of  the  prescribed  limits, 
on  condition  of  paying  a  tax  of  5  per  cent  per  annum  on  the 
excess,  but  its  reserve  must  not  at  any  time  be  less  than  one- 
third  of  its  outstanding  circulation.  This  elastic  clause  has 
been  vindicated  by  experience.  It  has  afforded  relief  to  the 
business  community  in  several  periods  of  monetary  stringency, 
and  without  any  harmful  consequences.  The  Imperial  Bank 
is  required  to  give  its  notes  in  exchange  for  gold  coin  or 
bullion,  and  its  notes  are  now  legal  tender  in  Germany. 
All  note-issuing  banks  are  required  to  receive  each  other's 
notes  at  par  and  to  redeem  their  own  notes  at  Berlin  or 
*  Frankfort,  as  well  as  at  their  own  counters.  The  net  profits 
of  the  Imperial  Bank  are  divided  between  the  shareholders 
and  the  imperial  treasury  in  a  proportion  fixed  by  law.  The 
Imperial  Bank  has  many  branches. 


400  BANKING 

Authorities 

Francis'  History  of  the  Bank  of  England. 

Rogers'  First  Nine  Years  of  the  Bank  of  England. 

Levi's  History  of  British  Co7Ji7nerce. 

A  History  ofBa?tkingin  All  Nations,  published  by  iht  fournal 
of  Commerce  and  Cojnmercial  Bulletin  (New  York,  1896). 

Macleod's  Theory  and  Practice  of  Bankitig. 

Somers'  Scotch  Banks  and  System  of  Issue. 

Breckenridge's  Canadian  Banking  System. 

Dunbar's  Chapters  in  the  Theory  and  History  of  Banking. 

Conant's  History  of  Modern  Banks  of  Issne. 

New  York  Chamber  of  Commerce  Report  on  the  Currency 
(October  4,  1906). 


CHAPTER  XVII 
RECENT  HISTORY 

It  has  been  the  author's  aim  in  the  preceding  chapters  to 
enable  the  reader  to  reach  right  conclusions  in  reference  to 
the  currency  problems  now  (1911)  confronting  us. 

The  principal  defect  of  our  national  bank  system  is  the 
rigidity  of  its  note  circulation.  In  a  broad  sense  the  vol- 
ume of  notes  is  regulated,  not  by  the  wants  of 
Note^issues  °  trade,  not  by  the  amount  or  kind  of  commer- 
cial paper  offered  for  discount,  but  by  the  mar- 
ket price  of  United  States  bonds.  Even  if  the  bonds  were 
sufficient  in  amount  and  satisfactory  in  price,  the  note  circu- 
lation would  still  be  lacking  in  the  elasticity  which  should 
characterize  a  good  system.  By  elasticity  is  meant  the 
capacity  to  increase  or  diminish  in  volume  in  accordance 
with  the  needs  of  the  community,  and  simultaneously  there- 
with. It  has  been  shown  in  a  previous  chapter  that  where 
note  issues  are  unrestricted  the  amount  of  notes  outstanding 
at  any  time  depends  not  upon  the  volition  of  either  the 
banker  or  the  depositor,  but  upon  the  public  demand. 
There  are  some  seasons  of  the  year,  also,  when  a  greater 
quantity  is  wanted  than  at  others,  and  these  familiar  ebbs 
and  flows  vary  in  different  localities  and  in  different 
trades.  A  flexible  currency  is  one  which  rises  and  falls 
in  volume  harmoniously  and  simultaneously  with  these 
trade  movements. 

Note  issuing  is,  to  the  banker,  simply  a  question  of  profit. 
When  he  buys  bonds  and  deposits  them  in  the  Treasury  as 
security  for  circulation,  he  virtually  buys  notes  from  the 

401 


402  BANKING 

government ;   and  his  question  is  whether  he  can  get  more 

profit  by  such  an  investment  than  by  using  his  capital  in  otlier 

ways.  Aside  from  the  interest  on  the  bonds, 
Seasonal  Demand    i  •  •  •  ^     r  ,  i 

for  Notes  ^^  gams  arise  only  from  the  average  amount 

of  his  notes  which  the  public  will  take  and 
hold.  There  will  always  be  some  notes  in  transit  to  Wash- 
ington for  redemption  and  thence  back  to  the  bank ;  and 
after  they  come  home  they  will  remain  unused  for  a  while. 
During  this  period  they  are  unproductive  capital.  Therefore 
the  banker  will  take  from  the  government  no  more  notes  than 
he  thinks  he  can  keep  in  circulation.  He  will  hold  none  for 
emergencies.  Thus  the  national  bank  currency  remains  for 
long  periods  nearly  uniform  in  amount,  while  in  countries 
where  notes  are  issued  according  to  the  "banking  principle" 
there  is  a  seasonal  outflow  and  inflow  of  notes  correspond- 
ing to  the  greater  or  less  demand  for  them.  The  contrast 
between  Canada  and  the  United  States  in  this  particular  is 
very  marked,  as  appears  from  the  charts  on  the  next  page. 

In  every  country  the  alternations  of  seedtime  and  harvest 
have  a  marked  influence  upon  the  currency  movement. 
During  the  spring  and  early  summer,  when  the  farmers  are 
engaged  in  planting  and  tilling  their  crops,  they  usually, 
incur  debt  to  the  country  merchants  for  household  supplies; 
and  the  currency  movement  is  then  sluggish.  When  harvest 
comes,  a  great  deal  of  work  must  be  done  within  a  short 
space  of  time,  and  this  requires  a  large  amount  of  currency 
to  pay  the  wages  of  laborers  and  to  meet  the  various  claims 
against  the  farmers  which  then  mature.  These  seasonal 
demands  are  imperative.  They  come  almost  simultaneously 
in  large  sections  of  the  country.  Every  other  demand  for 
currency  is  secondary  to  this,  since  the  only  time  to  harvest 
the  crops  is  when  they  are  ripe. 

The  annual  crop  movement  in  Canada  is  marked  by  an 
uplift  of  the  note  circulation,  while  no  corresponding  rise  is 


RECENT  HISTORY 


403 


observable  in  the  United  States.    What  takes  place  among 
us  is  a  withdrawal  of  the  cash  reserves  of  the  banks  and  a 


Note  Issues  of  the  Canadian  Banks 


|ptR 
106 

1894 

1895 

PEB 
CENT 

105 
100 

JAN.  FEB.  MAA. 

AMI.  MAY   JUNE 

JULY   AUG.  SEP. 

OCT.  NOV.  DEC. 

JAN.  FEB.  MAR. 

APR.  HAY    JUNE 

^     y 

/-^ 

—                           ' 

Note  Issues  of  the  National  Banks  of  the  United  States 


transference  of  the  same  from  the  commercial  centers  to  the 
farming  districts,  causing  a  contraction  of  loans  and  dis- 
Unnecessary  counts  to  a  much  larger  amount  than  that  of 

the  cash  so  withdrawn.  A  reverse  movement 
takes  place  after  the  crops  are  moved.  It  is 
the  opinion  of  good  judges  that  these  alternate  contractions 
and  expansions  exceed  two  hundred  million  dollars  in  both 
instances.    No   such  unsettlement  of  bank  reserves  takes 


Contraction  and 
Expansion. 


404  BANKING 

place  in  Canada  because  the  banks  can  issue  their  own 
notes  without  cost  in  the  autumn  and  retire  them  without 
cost  after  they  are  sent  home  for  redemption. 

When  proposals  were  made  in  1892  and  succeeding  years 
for  a  bank-note  circulation  based  on  the  assets  of  the  banks 
instead  of  government  bonds,^  one  of  the  reasons  advanced 
for  the  change  was  that  with  the  extinction  of  the  national 
debt  the  bond  security  of  the  notes  would  be  withdrawn  and 
that  the  existing  system  would  necessarily  come  to  an  end. 

At  that  time  nobody  had  conceived  the  idea  of  extending 
a  public  debt  already  matured  if  the  government  had  the 
money  with  which  to  pay  it  and  stop  the  interest.  Nobody 
would  have  dared  to  propose  it,  for  at  that  time  the  national 
finances  were  the  leading  issue  in  politics.  But  new  politi- 
cal issues  arose.  The  Spanish  War  came.  The  public  mind 
was  no  longer  centered  on  finance.  So  the  men  in  authority, 
who  ought  to  have  foreseen  the  coming  crisis  and  made 
plans  for  bank  circulation  on  some  other  basis,  extended  a 
large  part  of  the  maturing  public  debt  for  thirty  years,  al- 
though they  had  the  money  in  hand,  or  in  sight,  to  pay  it 
off  and  stop  the  interest. 

In  preparation  for  this  step  Congress  passed  the  act  of 
March  14,  1900,  authorizing  the  Secretary  of  the  Treasury 
to  refund  the  outstanding  debt  maturing  in 
Public  Debt.  ^  1904,  1907,  and  1908  into  new  bonds  to  run 
thirty  years,  bearing  interest  at  2  per  cent  per 
annum.  Prior  to  the  passage  of  this  act  it  had  always  been 
the  policy  of  the  government  to  pay  its  interest-bearing  debts 
as  soon  as  possible,  in  order  to  avoid  unnecessary  burdens 
upon  the  taxpayers.    To  this  end  bonds  redeemable  at  the 

1  One  such  proposal  was  made  by  the  American  Bankers'  Associa- 
tion at  its  annual  meeting  at  Baltimore,  in  October,  1894.  Another 
was  made  by  the  Secretary  of  the  Treasury  (Hon.  John  G.  Carlisle), 
in  his  annual  report  of  that  year. 


RECENT  HISTORY 


405 


pleasure  of  the  government  after  some  short  period  were 
generally  preferred.  Thus  the  5-20  bonds  issued  during  the 
war  were  made  redeemable  at  any  time  after  five  years  but 
payable  at  the  end  of  twenty  years.  Under  this  system 
the  Treasury  could  use  its  surplus  revenues  to  pay  bonds 
at  par  instead  of  buying  them  in  the  market  at  a  premium, 
and  the  money  would  be  restored  to  the  channels  of  business 
promptly. 

How  this  change  of  policy  was  carried  into  effect  was 
shown  in  the  Treasury  report  for  1904,  in  the  following 
tabular  statement : 


3   PER  CENTS 

4  PER  CENTS 

S  PER  CENTS 

TOTAL 

Amount   refunded 

into  2  per  cent 

consols  of  1930 

;^  1 19,260,000 

^35i»578,ooo 

$72,071,300 

$542,909,960 

Interest  saved  on 

old  bonds  to  ma- 

turity   .... 

27,283,662 

89,852,710 

13.050.355 

130,186,727 

Interest  to  be  paid 

on  new  bonds  to 

maturity  of  old 

bonds  .... 

18,189,108 

44,926,355 

5,220,142 

68,335>6os 

Premium  paid  for 

old  bonds      .     . 

6,239,833 

36,432,250 

6,872,572 

49.544.655 

Premium  received 

for  new  bonds   . 

407,606 

1,513.778 

1,939,384 

Net  profit     .     .     . 

3,262,327 

10,025,883 

957,641 

14,245,851 

In  this  way  the  policy  of  the  government  was  reversed, 
and  nearly  $550,000,000  of  the  public  debt  was  put  beyond 
the  chance  of  extinction  for  nearly  a  quarter  of  a  century, 
except  by  purchase  in  the  open  market.  For  the  privilege 
of  making  this  swap  the  government  paid  a  bonus  of  nearly 


406  BANKING 

$50,000,000  on  the  old  bonds,  of  which  it  recovered  less 
than  $2,000,000  as  premium  on  the  new  ones. 

The  foregoing  tabular  statement  purports  to  show  a  net 
profit  on  the  refunding  operation  by  ignoring  the  interest 
(amounting  to  $257,837,642)  'on  the  new  bonds  after  the 
maturity  of  the  old  ones.  After  deducting  the  apparent 
profit  shown  above  ($14,245,851),  the  loss  on  the  whole 
transaction  is  enormous,  but  we  cannot  reduce  it  to  exact 
figures,  because  we  do  not  know  how  much  of  the  extended 
debt  we  might  have  paid  off  if  it  had  not  been  thus  extended. 
We  know,  however,  that  a  surplus  of  $240,000,000  was  on 
hand  in  1907,  and  that  the  interest  on  that  amount  might 
have  been  extinguished.  Of  course  the  premium  on  the 
maturing  bonds  would  have  extinguished  itself. 

The  4  per  cent  bonds  of  1907  were  not  all  included  in  the 
list  embraced  in  the  Treasury  report  quoted  above.  Some 
of  them  were  left  to  run  to  maturity  (July  i,  1907),  so  that 

they  misfht  be  paid  if  the  government  should 
Loss  of  Interest.        ,  ,  ,  .      .         ,       ^, 

then  have  the  money  in  hand.  The  govern- 
ment did  have  the  money,  but  instead  of  applying  it  to  that 
purpose,  $50,000,000  of  bonds  were  extended  for  twenty- 
three  years  at  2  per  cent  interest,  and  the  money  which 
might  have  been  employed  in  payment  of  debts  was  deposited 
in  banks.  The  interest  which  the  government  is  thus  obli- 
gated to  pay,  and  which  it  might  have  wholly  saved  in  this 
instance,  was  $23,000,000  —  literally  cast  away  by  a  stroke 
of  the  pen. 

The  excuse  for  this  kind  of  financiering  was  that  if  the 
government's  interest-bearing  debt  were  paid,  there  would 
be  a  shortage  of  bonds  to  be  held  as  security  for  national 
bank  notes.  If  that  is  a  good  reason  for  keeping  $240,000,- 
000  of  bonds  alive  when  the  government  has  the  money  in 
hand  to  pay  them  off,  then  the  same  reasoning  would  justify 
the  selling  of  new  bonds  when  there  is  no  use  for  the  money 


RECENT  HISTORY  407 

which  they  bring  in  except  to  deposit  it  back  in  the  banks. 
And  that  is  what  the  Secretary  of  the  Treasury  did  in  No- 
vember, 1907.  Leaving  out  of  account  the  money  paid  for 
the  bonds  and  redeposited  in  the  banks  (as  equal  quantities 

on  the  opposite  sides  of  an  equation  cancel 

Bad  Financiering.  ,         ,       x       ,  .      .  ,  1       tt    •      i 

each  other),  this  is  a  case  where  the  United 

States,  in  its  capacity  as  a  government,  gives  the  banker  its 
note  bearing  semi-annual  interest,  and  payable  at  the  end  of 
thirty  years  and  not  before,  and  in  its  capacity  as  a  body 
of  citizens  takes  in  exchange  the  banker's  note  payable 
without  interest  at  no  particular  time.  But  even  this  device 
of  extending  a  debt  and  continuing  needlessly  to  pay  inter- 
est on  it  will  not  suffice  much  longer,  since  population  and 
trade  are  growing  more  rapidly  than  our  financiers  can  add 
to  the  public  debt.  Hence  the  proposal  to  use  other  bonds 
than  those  of  the  government  as  security  for  national  bank 
notes. 

In  1902  the  Secretary  of  the  Treasury  (Hon.  Leslie  M. 
Shaw),  finding  the  element  of  elasticity  wanting  in  our  cur- 
rency system,  sought  to  supply  the  defect  with- 

rule  changing  the  security  required  for  the  de- 
posit of  government  money  in  national  banks.  By  the  terms 
of  the  law  this  security  was  to  be  "United  States  bonds  and 
otherwise,"  the  word  "  otherwise  "  having  been  inserted,  as 
the  debates  of  Congress  prove,  in  order  to  include  the  per- 
sonal bonds  of  the  bank's  officers.  No  record  could  be 
various  Bonds  as  f°""^  °^  ^"y  deposit  having  ever  been  made 
Security  for  Gov-  in  a  bank  on  any  other  collateral  security  than 
emment  Deposits.  United  States  bonds,  until  Mr.  Shaw  decided 
that  the  word  "  and  "  was  equivalent  to  the  word  "  or."  State 
and  municipal  bonds  were  accepted  under  the  new  rule.  In 
making  the  announcement  of  this  change  of  practice,  how- 
ever, the   Secretary  stipulated  that   any  government  bonds 


408  BANKING 

released  as  security  for  deposits  should  be  used  as  security 
for  additional  bank  notes,  and  in  this  way  an  artificial 
stimulus  was  applied  to  the  taking  out  of  new  circulation. 
Two  years  later  the  Secretary  added  railroad  bonds  to  the 
list  of  securities  acceptable  for  deposits. 

Simultaneously  with  the  foregoing  rule  Secretary  Shaw 
made  another  which  released  the  national  bank  depositaries 
from  the  requirement  of  keeping  a  cash  reserve  against 
government  deposits.  Although  the  law  requires  the  reserve 
to  be  held  by  each  bank  against  "  the  aggregate  amount  of 
its  deposits,"  the  Secretary  argued  that  the  government  was 
abundantly  protected  by  the  securities  held,  and  hence  that 
a  cash  reserve  was,  in  this  case,  a  superfluity. 
Wo  Bank  Reserve    The  New  York  Clearing  House  took  the  view 

against  Govern-  *  i     i    i  i 

ment  Deposits.  that  the  law  could  not  be  repealed  by  the 
Secretary,  and  hence  that  its  members  should 
continue  to  maintain  a  reserve  of  25  per  cent  against  all 
deposits,  including  those  of  the  government.  The  act  of 
Congress  of  May  30,  1908,  however,  repealed  the  reserve 
requirement  as  to  government  deposits. 

In  1903  Mr.  Shaw  made  a  fresh  ruling,  that  national  banks 
which  have  been  designated  as  depositaries  of  public  money 
are  branches  of  the  Treasury,  and  hence  that  public  funds 
may  be  transferred  to  or  from  such  banks  at  any  time.  This 
rule  is  of  no  importance  except  as  showing  the  drift  of  the 
Secretary's  mind  and  his  purpose  to  get  the  public  funds 
into  shape,  to  be  expeditiously  moved  hither  and  thither  for 
what  he  considered  to  be  the  advantage  of  trade  and  com- 
merce from  time  to  time. 

In  1896  there  was  an  international  movement  of  gold 
toward  this  country,  which  Mr.  Shaw  thought  needed  to  be 
accelerated.  He  accordingly  notified  two  New  York  banks 
privately  that  if  they  would  engage  gold  for  importation  he 
would  deposit  an  equal  amount  of  the  metal  in  their  vaults 


RECENT  HISTORY  409 

SO  that  they  should  not  lose  the  interest  during  the  time  of 
transit  from  the  foreign  port  to  the  United  States,  and  a  few 
days  later  he  gave  public  notice  that  he  would  do  the  same 

for  other  depositary  banks.    This  announce- 
clirimporfs         ment   lowered    the    gold    import    point   and 

hastened  the  arrival  of  the  amount  of  metal 

which  the  conditions  of  international  trade  called  for,  but 

did  not  increase  the  amount  in  the  aggregate.     It  had  the 

effect    also  of  giving  the  depositary  banks   an  advantage 

over  all  other  persons,  firms,  and  corporations  engaged  in 

the  business  of  importing  gold. 

In  the  same  year  the  Secretary  made  such  arrangements 

for  moving  the  crops  in  the  coming  autumn  as  he  thought 

would  avert  the  usual  autumnal  pinch.     He  withdrew  $60,- 

000,000  of  public  money  from  the  banks  and  locked  it  up, 

in  order  to  have  a  supply  to  put  out  again  in  the  harvest 

season.    On  September  27  he  announced  that  $26,000,000 

would  be  put  in  the  banks  to  relieve  the  money 
Moving  the  Crops. 

market,  but  that  it  should  not  be  used  to  foster 

speculation  in  the  stock  market.  It  would  be  widely  dis- 
tributed far  from  the  purlieus  of  Wall  Street,  among  the 
banks  of  the  West  and  South.  In  spite  of  this  elaborate  plan 
of  campaign  the  speculators  had  the  best  of  it.^ 

In  his  annual  report  for  1906  Mr.  Shaw  expressed  the 
opinion  that  the  Secretary  of  the  Treasury  ought  to  be  clothed 
with  full  power  over  the  bank  circulation,  so  as  to  expand  or 

1  "  Notwithstanding  his  announcement  as  to  the  distribution  of  the 
deposits,  it  soon  appeared  that  probably  half  of  the  ^26,000,000  had 
found  a  resting  place  in  the  banks  of  New  York.  Amounts  at  first 
offered  to  banks  in  other  cities  were  declined,  because  the  banks 
could  not  supply  the  required  collateral,  and  other  deposits  actually 
made  in  interior  cities  were  reconsigned  to  New  York  because  of  the 
higher  rates  of  profit  there  prevailing."  —  "  The  Treasury  and  the 
Banks  under  Secretary  Shaw,"  by  A.  P.  Andrew,  in  the  Quarterly 
Journal  of  Economics^  August,  1907. 


41 0  BANKING 

contract  it  at  his  own  volition.    Also  that  he  ought  to  have 

authority  "  to   require  all  banks,  at  certain  times  fixed  by 

him,  to  slightly  and  gradually  increase    their 

Omniscience  in       reserves  and  hold  the  same  within  their  own 

the  Treasury  i  •  ,  i  •  ,       . 

Department.         vaults,  with  corresponding  authority  to  release 

the  same  from  time  to  time,  as  in  his  judgment 
will  best  serve  the  business  interests  of  the  country."  He 
did  not  claim  as  his  exclusive  possession  the  omniscience 
needed  for  the  exercise  of  such  powers,  but  generously  con- 
ceded it  to  all  his  predecessors  and  all  his  successors  in 
office.  Shortly  after  writing  this  report  he  ceased  to  be 
Secretary  of  the  Treasury. 

All  of  the  acts  above  enumerated  were  either  violations  of 
the  statute  law  or  assumptions  of  power  never  contemplated 
by  the  law  makers.  They  were  glaring  examples  of  "  pater- 
nalism in  government,"  which  assumes  that  the  holders  of 
public  office  know  how  private  business  ought  to  be  con- 
ducted better  than  business  men  themselves,  and  think  that 
their  powers  ought  to  be  made  commensurate  with  their 
superior  knowledge.  The  natural  and  immediate  conse- 
quence of  Mr.  Shaw's  action  was  that  the  speculators  in 
Wall  Street  cast  prudence  to  the  winds  and  clamored  for 
"  Treasury  relief  "  whenever  their  own  speculations  had  pro- 
duced tightness  in  the  money  market. 


CHAPTER   XVIII 

THE  PANIC  OF  1907 

Early  in  October,  1907,  there  were  signs  of  trouble  in  the 
New  York  Stock  Exchange.  Prices  of  securities  fell  with 
great  violence.  On  the  i6th  there  was  a  crash  in  the  market, 
started  by  the  failure  of  certain  speculators  in  copper-mining 
stocks.  Public  attention  was  thus  directed  to  a  group  of 
banks  in  the  management  of  which  these  persons  were  influ- 
ential. These  banks  fell  under  suspicion  and 
The  Knicker-        ^he  rumors  extended  to  other  speculators  and 

bocker  Trust  ......  ,  ,  rr- 1  •         1 

Company.  banking  mstitutions  supposed  to  be  affiliated 

with  them.  On  the  21st  the  National  Bank  of 
Commerce  announced  at  the  clearing  house  that  it  would 
no  longer  be  responsible  for  checks  drawn  on  the  Knicker- 
bocker Trust  Company,  one  of  the  largest,  and  perhaps  the 
most  conspicuous,  of  the  financial  institutions  of  the  city. 
On  the  following  day  there  was  a  run  on  it  by  depositors, 
and  it  closed  its  doors  after  paying  $8,000,000  over  its 
counter.^ 

With  the  failure  of  the  Knickerbocker  Trust  Company  the 
panic  became  general.  Prominent  bankers  held  a  meeting 
at  midnight  to  take  measures  to  stop  it,  and  the  Secretary  of 
the  Treasury,  Mr.  Cortelyou,  came  from  Washington  and 
promised  to  assist. 

On  the  23d  a  run  on  the  Trust  Company  of  America  began, 
and  the  bankers  gave  it  assistance  so  that  it  was  able  to  pay 
out  $13,000,000  in  cash  in  one  day  without  closing  its  doors. 

1  The  Knickerbocker  Trust  Company  was  resuscitated  after  the 
panic  by  new  subscriptions  to  its  capital  stock. 

411 


412  BANKING 

On  the  same  day  a  run  was  started  on  the  Lincoln  Trust 
Company,  but  was  successfully  met.    There  was  a  renewed 

and  heavy  break  on  the  stock  exchange,  and 
The  Run  on  other   -i_  i.     r  n 

Trust  Companies.  ^^^  ^^^^  ^°^  ^^^^  money  rose  to  90  per  cent; 
time  loans  could  not  be  had  on  any  terms. 
The  Westinghouse  companies  of  Pittsburg  were  placed  in 
the  hands  of  receivers  for  inability  to  meet  maturing  obli- 
gations. 

October  24  the  panic  reached  its  height ;  call  money  was 
not  obtainable.  A  bankers'  pool  was  organized  to  deal  with 
the  situation.  By  offering  $25,000,000  at  10  per  cent  they 
broke  the  deadlock.  Secretary  Cortelyou  deposited  $19,- 
000,000  in  the  banks.  The  run  continued  on  the  two  trust 
companies,  but  all  demands  were  met. 

During  this  time  there  had  been  a  heavy  drain  on  the 
New  York  bank  reserves  from  banks  in  other  parts  of  the 
country.  On  the  26th  the  clearing  house  decided  to  issue 
loan  certificates  in  the  mode  prescribed  in  the  panic  of  1893. 
This  was  virtually  a  general  bank  suspension,  but  while  most 
of  the  banks  used  their  discretion  either  to  pay  checks  pre- 
sented at  their  counters  in  cash,  or  to  stamp 
ReservTs.^^''^  them  "good  through  the  clearing  house," 
several  of  them  paid  all  checks  presented 
without  any  discrimination  whatever.  The  example  of  New 
York  was  followed  almost  instantaneously  by  all  the  clearing 
houses  of  the  country,  including  that  of  Chicago,  which  had 
never  before  issued  a  loan  certificate.  A  premium  on  cur- 
rency made  its  appearance  on  November  2,  as  in  the  panic 
of  1893,  and  the  various  devices  employed  in  that  year  for 
paying  wages  and  carrying  on  retail  trade  by  means  of  small 
certificates  and  pieces  of  stamped  cardboard,  were  repeated 
everywhere.  The  premium  on  currency  increased  gradually 
to  4  per  cent,  as  quoted  in  the  newspapers,  but  in  fact  it 
reached  5  and  6  per  cent  in  some  instances  where  large  sums 


THE  PANIC   OF  1907  413 

were  imperatively  required.    This  was  a  case  where  whole- 
sale prices  were  higher  than  retail.    The  exchanges  of  the 

country  were  thrown  into  confusion.  On  Oc- 
CurSncy."''  ^°^^^  ^9  Chicago  drafts  on  New  York  were 

quoted  at  $2.50  per  $1000  discount.  In  other 
places  the  usual  country  balances  in  New  York  had  been 
so  far  drawn  down  that  the  banks  in  the  interior,  although 
having  plenty  of  cash  in  hand,  could  not  sell  drafts  on  New 
York  at  all. 

It  happened  that  we  had  been  blessed  with  an  abundant 
wheat  harvest,  while  there  had  been  a  shortage  in  all  European 
countries  except  France.  The  price  of  wheat  was  accord- 
ingly the  highest  that  had  been  known  for  several  years,  and 
the  export  of  this  staple  gave  our  bankers  an  abundance  of 
commodity  bills  with  which  to  command  gold  abroad.  Ster- 
ling exchange  fell  to  4.82  on  October  26,  and  to  4.80  on 
October  28,  on  which  "day  $18,750,000  in  gold  was  engaged 
in  London  for  importation.  This  movement  continued  until 
December  23,  during  which  time  $107,000,000  in  gold  was 
imported,  all  of  which  was  paid  for  with  exported  grain  and 
cotton.     During  a  part  of  this  movement  the  quotations  for 

demand  sterling  were  above  par  (4.86.6),  and 
oiTGoid   ^°°  even  went  as  high  as  4.91,  so  that  some  people 

said  we  were  buying  gold  at  a  premium.  But 
the  quotation  4.91  was  not  a  quotation  of  cash,  but  of  bank 
checks  that  were  selling  in  Wall  Street  at  about  96  cents  on 
the  dollar.  The  premium  on  currency  continued  until  the 
last  of  December.  During  this  interval  of  two  months  foreign 
bills  of  exchange  drawn  on  American  houses,  banks,  or  cor- 
porations were  of  uncertain  value.  They  might  be  paid  at 
par  or  at  varying  rates  of  discount  according  to  the  will  of 
the  debtor.  Interest  due  on  bonds  and  other  obligations 
held  abroad  was  subject  to  the  same  uncertainty,  for  although 
legally  payable  at  par,  few  creditors  could  afford  to  lose  time 


414  BANKING 

and  hire  lawyers  to  bring  suit  to  recover  the  difference. 
This  was  the  most  humiliating  feature  of  the  panic.  It  justi- 
fied the  saying  of  a  foreign  critic  that  the  United  States  was 
"  a  great  international  financial  nuisance." 

On  November  1 7  announcement  was  made  at  Washington 
that  the  Treasury  would  come  to  the  relief  of  the  business 
community  by  issuing  $50,000,000  of  Panama  canal  bonds, 
and  $100,000,000  of  one-year  3  per  cent  certificates  of  in- 
debtedness. As  both  of  these  operations  contemplated  the 
borrowing  of  money  from  a  market  already  staggering  with 
the  demands  upon  it,  the  promised  relief  was 
Government^  never  experienced.  The  design  of  the  Presi- 
dent and  Secretary  was  to  issue  a  security 
which,  by  the  offer  of  3  per  cent  interest,  would  draw  hoarded 
money  out  of  its  hiding  places,  and  also  to  increase  the 
amount  of  2  per  cent  bonds  in  the  market  which  could  be 
used  as  security  for  national  bank  notes.  There  was  a  brief 
spurt  on  the  stock  exchange  when  this  plan  was  promul- 
gated, but  on  the  next  day  the  depression  was  as  great  as 
before,  and  on  the  three  following  days  it  became  still  greater. 
Critics  said  that  the  proposed  issue  of  certificates  was  not 
authorized  by  law,  and  that  the  proposed  issue  of  bonds, 
if  lawful  and  successful,  would  be  a  fresh  drain  on  the  cash 
reserves  of  the  banks  which  could  not  be  recouped  in  months. 
Announcement  was  subsequently  made  that  75  per  cent  of 
the  subscriptions  for  3  per  cent  certificates  would  be  allowed 
to  remain  as  deposits  in  the  vaults  of  the  subscribing  banks 
and  90  per  cent  of  the  subscriptions  for  Panama  bonds.  On 
that  basis  $25,000,000  of  Panama  canal  bonds  were  sold  and 
$14,086,500  of  3  per  cent  certificates.  Banking  opinion  was 
nearly  unanimous  that  the  government's  intervention  had  not 
been  helpful,  but  the  contrary. 

The  cause  of  the  panic  was  the  existence  of  a  large  num- 
ber of  debts  that  could  not  be  paid  at  maturity.    Some  debts 


THE  PANIC   OF  1907  415 

are  maturing  all  the  time  that  cannot  be  paid.  These  cause 
a  small  crisis  in  each  case,  but  it  is  noticed  only  by  the 
individuals  immediately  concerned.  If  all  persons  who  are 
in  debt  could  pay  their  obligations  when  they 
Panic  °      ^  ^^^^  ^^^'   ^^^^^'^  could   be   no   financial  crisis, 

large  or  small.  The  cause  of  an  excessive 
amount  of  debt  that  cannot  be  paid,  must  be  sought  in  the 
varying  conditions  of  trade,  which  are  simply  the  indices  of 
varying  states  of  the  public  mind. 

There  are  periods  when  all  or  nearly  all  men  in  business 
are  very  hopeful  and  enterprising.  They  are  then  apt  to 
extend  their  business  and  take  risks.  They  are  eager  to 
borrow  money,  purchase  goods  on  credit,  enlarge  their  works, 
buy  more  land,  erect  new  buildings,  buy  stocks  on  margin, 
—  in  other  words,  to  speculate.  The  prices  of  the  things 
bought  are  forced  up  by  the  competition  of  buyers,  but  the 
necessity  always  exists  of  paying  for  the  things  purchased 
and  meeting  the  obligations  incurred  in  terms  of  gold  dollars. 

A  time  comes  in  the  upward  rush  when  this  cannot  be 
done  because  the  prices  are  too  high.  Then  the  speculators 
begin  to  fail.  Those  whose  liabilities  are  largest  in  propor- 
tion to  their  capital  fail  first.  Their  failure  brings  down 
others,  who,  in  ordinary  times,  would  "  pull  through,"  even 
though  they  might  incur  losses  through  improvident  ven- 
tures. Presently  the  whole  business  community  perceives 
a  danger  impending  —  the  danger  that  any  person  owing 
money  and  not  having  it  in  his  immediate  possession  may 
not  be  able  to  get  it.    This  starts  the  panic. 

Perhaps  the  most  striking  phenomenon  of  the  panic  was 
the  rush  of  the  country  banks  to  draw  their  money  out  of 
the  central  reserve  cities,  where  the  bulk  of  it  was  held. 
This  proves  that  there  is  much  human  nature  in  bankers, 
but  it  proves  even  more  conclusively  that  our  banking  sys- 
tem is  behind  the  age  and  needs  betterment. 


CHAPTER  XIX 

THE  STOCK  EXCHANGE  AND  THE  MONEY  MARKET 

Shortly  after  the  panic  of  1907  began,  a  rumor  became 
current  that  "  Wall  Street "  had  designedly  caused  it  in  order 
to  depress  the  prices  of  stocks,  to  frighten  weak  holders, 

and  to  profit  by  the  ruin  of  the  community. 
change^Pa^c'       '^^^^  conception  was  erroneous,  but  it  derived 

plausibility  from  the  fact  that  stocks  had 
taken  a  sudden  and  violent  downfall  without  any  apparent 
cause  and  that  this  fall  continued  increasingly  from  day  to 
day.  The  immediate  cause  was  the  simultaneous  selling  of 
securities  by  holders  in  all  parts  of  the  country,  and  in 
Europe  also,  who  perceived  that  there  was  trouble  impend- 
ing and  who  wanted  cash  to  meet  maturing  obligations. 
There  were  more  sellers  than  buyers  at  the  prices  prevailing 
on  the  stock  exchange  at  any  given  moment,  and  that  fact 
caused  the  decline.  The  remoter  cause  was  a  long  course 
of  over-speculation,  not  only  in  stocks  but  in  nearly  all  kinds 
of  property  here  and  elsewhere. 

The  relations  of  the  stock  exchange  and  the  money  market 
to  each  other  are  primarily  those  of  the  promoter  and  the  in- 
vestor, and  secondarily  those  of  the  borrower  and  the  lender. 
The  distinction  between  money  and  capital  should  first  be 
noted.    Capital  consists  of  all  the  goods  in  the  world  that 

are  subject  to  sale  and  transfer.    Money  is  an 

Distinction  be-      instrument    of    exchange,    the    possession    of 
tween  Money  and       ....  ,  ,       .  .     , 

Capital.  which  gives  the  owner  command  of  capital 

at   the  prices  prevailing    at    any  given   time. 

The  supply  of  capital  is,  in  the  nature  of  things,  limited. 

416 


STOCK  EXCHANGE  AND  THE  MONEY   MARKET    417 

Both  the  production  and  the  consumption  of  capital  go  on 
at  all  times.  The  excess  of  production  over  consumption 
forms  new  capital  available  for  the  creation  of  additional 
means  of  production,  from  which  income  may  be  derived. 
The  owners  of  this  excess  may  themselves  apply  it  to  this 
purpose,  or  transfer  it  to  others.  Ordinarily  an  easy  money 
market  means  that  the  demand  for  capital  is  not  in  excess 
of  the  supply.  Conversely,  a  tight  money  market  means  that 
the  demand  has  overtaken  the  supply  and  that  men  are 
bidding  against  each  other  for  the  possession  of  it ;  the  com- 
petition of  bidders  causes  general  prices  and  the  rate  of 
interest  to  rise. 

The  function  of  the  stock  exchange  as  a  promoter  of  new 

enterprises  consists  of  its  great  clientage  of  buyers,  of  its 

facilities  for  advertising  securities,  and  of  its  reputation  for 

carefulness  in  scrutinizing  applications  for  ad- 

The  stock  Ex-  mission  to  its  list.  Its  buyers  are  practically 
change  as  a  .  ,,-i,,.. 

Promoter.  mnumerable  in  both  hemispheres.    Its  quota- 

tions are  published  free  of  cost  in  nearly  all 
daily  newspapers.  No  enterprise  is  admitted  to  its  trading 
list  without  previous  examination  by  a  committee  of  experts. 
Whilfe  the  exchange  does  not  guarantee  the  goodness  of  any 
security,  or  even  the  truthfulness  of  the  statements  filed  by 
its  managers,  it  requires  the  filing  of  such  statements  prior 
to  admission,  and  at  stated  intervals  thereafter,  and  it  inflicts 
summary  punishment  for  any  breach  of  good  faith  therein. 
Thus  the  fact  of  admission  to  the  list  becomes  prima  facie^ 
although  not  conclusive,  evidence  of  the  character  of  the 
investment. 

The  money  market  consists  of  all  the  loanable  funds  in 
the  country.  The  money  which  people  are  using  in  their 
daily  business,  which  passes  from  hand  to  hand  in  retail 
trade,  is  no  part  of  the  money  market,  because  it  cannot  be 
recalled  from  the  immediate  service  which  it  is  rendering 


4l8  BANKING 

to  society.  The  bulk  of  loanable  funds  of  the  country  consists 
of  bank  credits  which  are  bottomed  on  gold  ;  and  the  mag- 
nitude of  such  credits  is  limited  by  the  amount 
MaiVus.^'"'"^  of  "  lawful  money  "  held  by  the  banks  as  re- 
serves. Bank  notes  are  not  available  as  re- 
serves of  national  banks,  although  they  are  such  for  state 
banks  and  trust  companies.  Any  attempt  to  enlarge  the 
loanable  funds  of  the  banks  by  "taking  out"  bank  notes 
not  needed  for  hand-to-hand  circulation  would  be  checked 
by  their  prompt  return  for  redemption  in  lawful  money. 

The  most  common  function  of  banks,  as  we  have  seen,  is 
the  discount  of  commercial  paper  running  for  short  periods 
of  time  and  representing  actual  transfers  of  property  in  the 
business  world.  In  this  way  the  bank  exchanges  its  well- 
known  credit  for  the  less-known  credit  of  merchants  and 
manufacturers.  An  ideal  condition  for  a  bank  is  one  wherein 
the  supply  of  good  bills  is  sufficient  to  absorb 
secumfe^s°°  ^^^  ^^  ^^^  loanable  credit,  and  where  the  inflow 

of  cash  from  maturing  ones  is  equal  to  the 
outgo  of  new  ones.  There  is  always  some  difference,  how- 
ever, in  the  character  and  quality  of  bills  offered  for  discount, 
and  when  the  amount  of  acceptable  paper  is  less  than  the 
amount  of  the  bank's  loanable  funds,  advances  may  be 
made  on  goods  or  securities  that  are  readily  salable  in  the 
market.  In  this  way  interest  is  earned  on  money  that  would 
otherwise  remain  idle.  In  the  event  that  securities  of  this 
character  are  not  available  at  home  the  banker  may  place  his 
surplus  funds  as  deposits  payable  on  demand  in  some  other 
place  where  such  securities  are  bought  and  sold.  Usually 
a  low  rate  of  interest,  say  2  per  cent,  is  allowed  on  such 
deposits. 

The  piling  up  of  these  deposits  in  the  banks  of  New  York 
lowers  the  rate  of  interest  on  call  money  and  incites  specu- 
lation.   If  Union  Pacific,  for  example,  pays  dividends  of  10 


STOCK  EXCHANGE  AND  THE  MONEY  MARKET    419 

per  cent  and  is  selling  at  170  or  under,  it  yields  5.6  per  cent 
on  the  purchase  price.  If  the  purchaser  can  borrow  money 
on  call  at  i^  per  cent,  as  frequently  happens, 
specuiatfon  ^^  ^ams  a  profit  of  3^  to  4  per  cent  as  long 

as  such  conditions  continue.  Speculation  thus 
started  may  run  a  considerable  time  and  draw  in  a  large 
number  of  participants  and  extend  sympathetically  to  the 
whole  list.  Speculators  may  bid  up  the  price  of  stocks,  and 
the  rate  of  interest  at  the  same  time,  until  a  climax  is 
reached.  Then  a  reaction  will  come,  stocks  will  fall,  margins 
will  be  exhausted,  speculators  will  be  sold  out,  banks  may 
fail,  liquidation  will  pursue  its  inexorable  course,  until  a 
tabula  rasa  is  made,  upon  which  a  new  cycle  of  inflation 
and  collapse  may  take  its  start. 

The  essential  difference  between  the  two  methods  of  em- 
ploying a  bank's  resources  is  that  discounted  bills  are  always 
bringing  in  the  means  of  payment  of  the  banker's  liabilities, 
while  loans  on  collateral,  whether  payable  on  call  or  at  a 
fixed  time,  depend  on  the  sale  of  the  securities,  the  selling 
of  which  may  be  restricted,  or  prevented  altogether,  by  the 
lack  of  buyers  in  the  market. 

The  stock  exchange  is  a  meeting  place  of  the  buyers  and 
sellers  of  invested  capital  ;  that  is,  of  incomes  present  or 
prospective.  Capital  is  the  result  of  saving.  If  not  the 
parent  of  civilization,  it  is  the  indispensable  promoter  and 
handmaid  of  it,  since  capital  gives  mankind  the  leisure  and 
the  means  to  take  new  steps  forward  in  solving  the  problems 
of  human  existence.  It  is  desirable  that  there  should  be 
facilities  for  investing  the  savings  of  the  people  without 
serious  delay.  Such  facilities  promote  saving.  It  is  desirable 
also  that  investments  should  be  reconvertible  into  cash  with- 
out delay.  The  raisoti  d^etre  of  a  stock  exchange  is  to  supply 
a  place  where  money  can  be  invested  quickly  and  recovered 
quickly,   or   upon   which    the    investor   can    borrow  money 


420  BANKING 

immediately  if  he  so  desires.  It  is  an  incidental  advantage 
that  the  stock  exchange  informs  all  investors,  and  intending 
investors,  daily  and  without  cost  to  themselves,  of  the  prices 
at  which  they  can  buy  or  sell  the  securities  on  the  active 
list  of  the  exchange.  These  prices  are  made  by  the  com- 
petition of  buyers  and  sellers  in  the  market,  who  are  acting 
under  the  spur  of  self-interest.  There  is  no  other  way  in 
which  true  prices  can  be  made.  If  the  quotations  so  nridc 
are  not  precisely  the  truth  in  every  case,  they  are  the  nearest 
approach  to  it  that  mankind  has  yet  discovered. 

The  gross  amount  of  negotiable  securities  admitted  to  the 
New  York  Stock  Exchange  is  upwards  of  $25,000,000,000. 
The  sales  of  securities  on  the  exchange  during  the  calendar 
year  1909  were  upwards  of  $20,000,000,000  cash  value.  Such 
figures  are  like  the  distances  of  the  fixed  stars  ;  the  human 
mind  fails  to  grasp  them. 

Under  the  rules  of  the  stock  exchange  every  trade  made 

on  the  floor  must  be  settled  and  completed  within  twent}- 

four  hours,  unless  otherwise  specified  ;   i.e,,  the  seller  must 

deliver  the  thing  sold,  and  the  buyers  must 

Buying  on  Margin.  r        ^  •      r    n       *.         u    r  r  .1 

pay  for  it  m  full,  at  or  before  2.15  p.m.  of  the 
day  following  the  transaction.  All  but  an  insignificant  part 
of  the  trading  on  the  exchange  is  of  this  kind.  If  all  the 
purchasers  should  pay  in  full  with  their  own  money,  there 
would  be  no  resort  to  loanable  funds.  But  probably  nine- 
tenths  of  the  transactions  are  speculative.  In  such  cases 
a  portion  of  the  money,  say  10  or  20  per  cent,  is  supplied 
by  the  buyer,  and  an  equal  sum  by  the  broker  who  makes 
the  purchase,  and  the  latter  borrows  the  remainder  from  a 
bank,  giving  the  stock  or  bonds  so  bought  as  security  for  the 
loan.  The  amount  advanced  by  the  purchaser  is  called  the 
margin,  and  there  is  always  an  agreement,  express  or  im- 
plied, that  the  margin  shall  be  kept  good  in  case  the  market 
price  of  the  securities  declines.    If  the  purchaser  fails  to 


STOCK  EXCHANGE  AND  THE  MONEY  MARKET    42 1 

respond  when  called  upon  for  more  margin,  the  broker  may 

sell  him   out.    The  bank  exercises   the   same  privilege   as 

against  the  broker.    The  bank  may  call  upon  the  broker  at 

any  time  and  without  assigning  any  reason.    The  percentage 

of  the  margin  that  may  be  required  is  a  matter  of  bargain 

between  the  parties. 

The  making  of  bank  loans  to  stock  brokers  is  bottomed 

primarily  on  the  confidence  which  the  banker  has  in  the 

broker  as  a  person,  and  secondarily  on  the 
Loans  to  Brokers.  •  •  rr        1  1 

goodness  of  the  securities  offered.     The  modus 

operandi  is  substantially  this  :  The  broker,  knowing  from  his 

clearing  sheet  of  yesterday  what  payments  he  has  to  meet 

to-day,  obtains  from  his  bank  in  the  morning  authority  to 

draw  for  this  aggregate  amount  at  an  agreed  rate  of  interest. 

As  his  checks  come  in  during  the  day  the  bank  certifies  them 

and  the  broker  sends  to  the  bank  securities  whose  market 

value    is   greater   by   a   certain   margin    than    the    amount 

borrowed. 

These  loans  are  usually  payable  on  call.  As  national  banks 
are  forbidden  by  law  to  certify  checks  for  a  sum  greater  than 
the  drawer  of  the  checks  has  on  deposit,  the  practice  in  such 
cases  is  for  the  broker  to  execute  a  promissory  note,  which 
note  the  banker  discounts,  putting  the  proceeds  to  the  credit 
of  the  broker,  and  attaching  the  security  to  it  as  it  comes  in 
during  the  day.  While  this  method  exposes  the  banker  to 
some  danger  of  loss  in  the  interval  between  the  certification 
of  checks  and  the  receipt  of  the  securities,  such  losses  sel- 
dom occur.  There  is  an  unwritten  rule  of  the  stock  exchange 
that  the  bank  must  be  protected  at  all  hazards,  both  as  a 
matter  of  personal  honor  and  because  the  stock-brokerage 
business  cannot  be  carried  on  otherwise. 

The  relations  of  the  stock  exchange  and  the  money  market 
as  borrower  and  lender  are  by  no  means  as  simple  as  they 
seem.    The  twain  are  gigantic  bodies  which  act  and  react 


422  BANKING 

upon  each  other  like  planets  revolving  around  a  common 
center.  It  is  a  problem  of  great  complexity  to  find  the 
causes  of  the  conditions  prevailing  at  any  time. 

Periods  of  confidence  and  periods  of  depression  come  and 
go  in  undulations.  The  business  world  has  had  its  ups  and 
downs,  not  exactly  with  regularity  but  with  something  ap- 
proaching it,  during  the  past  three  centuries.  The  essential 
factor  and  prime  cause  of  a  commercial  crisis  is  speculation 
leading  to  inflated  prices  and  the  piling  up  of  debts  based 

upon  such  inflation,  which  the  debtors  cannot 
oXTcuSr      P^y-    The  crisis   of  1907   was  of  this  kind. 

There  is  no  evidence  that  the  crisis  was  due 
in  any  special  manner  to  stock  speculation.  Doubtless  stock 
trading  rdiU  pari  passu  with  other  trading  —  it  generally  does. 
The  inflation  which  prevailed  generally  did  not  avoid  the 
precincts  of  the  stock  exchange,  but  that  institution  was  not 
a  sinner  above  others.  It  was  the  most  conspicuous  sufferer, 
however.  More  columns  in  the  newspapers  were  given  to  it, 
more  eyes  were  turned  upon  it,  than  upon  any  other.  So 
when  the  rate  of  interest  went  up  momentarily  to  125,  there 
was  a  shock  in  the  financial  world.  But  the  plight  of  the 
man  who  paid  125  per  cent  over  night  or  for  a  few  days,  in 
order  to  avoid  a  greater  loss,  was  not  so  bad  as  that  of  the 
merchant  or  manufacturer,  who  could  not  get  his  paper  dis- 
counted at  all.  The  benevolent  usury  law  prevented  him 
from  paying  more  than  6  per  cent,  and  there  was  no  money 
to  be  had  at  that  rate  on  a  commercial  basis,  —  none  except 
as  a  matter  of  favor. 

Banks  find  it  for  their  interest  to  take  care  of  their  regular 
customers  in  times  of  panic,  but  they  have  the  right  to  dis- 
criminate, and  they  exercise  it.  The  temptation  of  125,  or 
even  25,  per  cent  is  not  easily  resisted.  Here  the  stock  ex- 
change exercises  an  influence  on  the  money  market.  It  can 
draw  money  from  the  banks  that  ought  to  be  at  the  service 


STOCK  EXCHANGE  AND  THE  MONEY   MARKET    423 

of  productive  industry,  since  money  tends  to  go  to  places 

where  the  highest  reward  is  offered  for  it.    The  country  banks 

must  keep  some   balance   in   the   city   banks 

Interest  on  £^^  ^j^^  convenience  of  their  customers.    They 

Deposits.  } 

are  allowed  to  keep  three-fifths  of  their  legal 

reserve  in  a  city  bank.  The  law  lends  its  influence  to  this 
extent  to  the  piling  up  of  money  for  the  use  of  stock  specu- 
lators. This  system  is  sometimes  fraught  with  danger,  and 
the  question  has  been  under  debate  for  half  a  century 
whether  the  payment  of  interest  on  deposits  ought  to  be 
allowed  at  all. 

How  to  prevent  it  is  a  question  perhaps  even  more  diffi- 
cult of  solution.  If  national  banks  were  forbidden  to  pay 
interest  on  deposits,  the  prohibition  would  not  extend  to  the 
state  banks,  trust  companies,  and  private  bankers.  These 
would  pay  interest  for  the  surplus  funds  of  the  country 
banks,  and  the  national  banks  would  thus  be  at  a  dis- 
advantage. If  the  country  banks  in  the  national  system  were 
not  allowed  to  keep  three-fifths  of  their  reserves  in  the  city 
banks,  they  would  compete  at  a  disadvantage  with  the  state 
banks  in  their  own  localities.  Thus  the  advocates  of  prohibi- 
tion of  interest  on  deposits  always  come  to  an  impasse^  and 
the  old  system  continues.  It  continues  because  it  has  an 
economic  basis.  The  fact  that  there  may  be  a  general  crisis, 
say  once  in  every  ten  years,  and  a  spasmodic  grab  for  bank 
deposits,  is  a  problem  by  itself,  which  may  be  open  to  more 
than  one  solution.  Any  arrangement  which  should  quiet  the 
fears  that  lead  to  the  grabbing  of  deposits  would  effect  a 
cure  of  this  disorder.  This  end  is  secured  in  most  European 
countries  by  means  of  a  central  bank  of  issue. 

The  relations  of  the  stock  exchange  to  the  money  market 
as  a  borrower  are  of  the  same  nature  as  those  of  the  produce 
exchange  and  of  the  cotton  exchange.  The  only  difference 
is  in  the  magnitude  of  the  transactions.   The  stock  exchange 


424  BANKING 

is  SO  large,  its  borrowings  at  times  so  colossal,  that  they 
affect  the  money  supply  of  the  world  and  are  capable  of 
absorbing  the  last  dollar  that  can  be  tempted  from  the  vaults 

of  banks  or  the  pockets  of  individuals  in  both 
an  Evn^^^*^°^       hemispheres.    This  absorption  may  take  place 

by  the  rise  of  prices  of  the  securities  traded  in, 
or  by  the  quantity  offered,  or  both.  Usually  the  demand  for 
money  is  most  imperative  when  the  prices  are  highest  and 
the  trading  most  active.  The  question  whether  this  condi- 
tion is  an  evil,  is  in  effect  the  same  as  asking  whether 
speculation  is  an  evil.  Upon  this  point  Governor  Hughes's 
committee  on  speculation  in  securities  and  commodities  in 
1909  reached  the  conclusion  that  to  some  persons  it  is  an 
evil  and  to  others  not,  and  that  there  is  no  way  to  prevent 
it  without  putting  an  end  to  trading  altogether.  It  should  be 
added  that  speculation  has  a  steadying  effect  on  the  market 
prices  of  both  securities  and  commodities.  To  banish  it 
would  be  to  banish  nine-tenths  of  the  business,  in  which  event 
the  fluctuations  in  prices  would  be  greater,  and  the  work  of 
the  manipulator  more  facile  and  dangerous,  than  now.^ 

1  See  article,  "  Shall  Speculation  be  regulated  by  Law,"  by  Henry 
C.  Emery,  in  \\\q  Journal  of  Accountancy^  April,  1908. 


CHAPTER   XX 
PRESENT  PROBLEMS 

The  panic  of  1907  directed  public  attention  sharply  to 
the  currency  question  as  an  unsolved  problem,  and  it  soon 
became  apparent  that  there  was  a  preponderance  of  opinion 
among  the  commercial  classes  in  favor  of  "  asset  currency." 
The  supporters  of  the  latter  system,  as  opposed  to  the  ex- 
isting bond  deposit  system,  hold  that  a  bank 
opinion*  ^^^^'^  ^°^^  ^^  ^^^  same  in  principle  as  a  deposit  pay- 
able on  demand,  and  that  the  same  percentage 
of  cash  reserve  that  suffices  for  the  one  will  suffice  for  the 
other.  They  maintain  that  the  assets,  i.e.,  the  short-time  and 
constantly  maturing  obligations  of  the  bank's  customers,  are 
a  better  basis  for  the  prompt  redemption  of  all  of  the  bank's 
obligations  than  any  long-time  securities,  and  that  asset  cur- 
rency adjusts  itself  automatically  to  the  public  demand  and 
hence  is  an  elastic  currency.^ 

Many  commercial  bodies  took  action  on  the  currency 
question  after  the  panic  came,  but  two  important  ones  be- 
gan to  investigate  it  in  a  systematic  way,  earlier,  —  the  New 
York  Chamber  of  Commerce  and  the  American  Bankers' 

1  Mr.  Alexander  Gilbert,  president  of  the  New  York  Clearing 
House,  testified  before  the  House  Committee  on  Banking  and  Cur- 
rency, April  13,  1908,  that  his  bank  made  loans  of  ;^2 5,000,000  to  $t,o,- 
000,000  on  commercial  paper  in  1907,  and  that  the  losses  on  such 
paper  for  fifteen  months  (to  April  i,  1908),  including  the  whole  of  the 
panic,  had  not  exceeded  one-fifth  of  one  per  cent.  In  this  computa- 
tion he  had  reckoned  as  losses  all  paper  not  paid  at  maturity,  although 
a  large  percentage  or  even  the  whole  might  be  eventually  collected. 
New  York  City  bonds  had  declined  in  the  same  period  13.3  per  cent. 

425 


426  BANKING 

Association,  —  both  of  which  decided  in  favor  of  an  asset 
currency,  with  some  differences  of  detail.  The  former  pre- 
ferred a  central  bank  if  such  an  institution  were  feasible, 
but  evidently  did  .not  consider  it  practicable  in  a  political 
sense.  The  latter  prepared  a  bill  for  an  asset  currency  and 
forwarded  it  to  Congress  for  consideration. 

The  prime  defect  of  the  existing  system  is  the  requirement 
that  the  bank  shall  purchase  its  circulating  notes  by  deposit- 
ing an  equal  or  greater  value  in  the  Treasury  beforehand. 
In  this  way  the  element  of  credit  is  expunged. 

Defect  of  the         ^nd  the  only  benefit  remaining  is  the  greater 

Bond  Deposit  .  .  .  ,  T        n- 

System.  convenience  m  carrymg  and  handlmg  paper 

instead  of  metal.  After  the  notes  are  bought 
a  loss  can  be  avoided  by  the  banker  only  by  keeping  them 
in  circulation.  He  receives  only  i|  per  cent  interest  on  his 
deposited  bonds  after  paying  the  circulation  tax.^  The  mo- 
ment the  notes  come  back  to  him  they  begin  to  burn  his 
pocket.  The  Canadian  banker  loses  nothing  by  locking  up 
his  circulating  notes  after  the  demand  slackens,  since  they 
did  not  cost  him  anything  in  the  first  instance. 

For  the  foregoing  reasons  our  banker  will  not  take  out 
more  notes  than  he  thinks  he  can  keep  in  circulation  all 
or  nearly  all  the  time.  He  will  not  provide  himself  with  a 
surplus  for  harvest  time  or  other  emergencies.  Such  a  cur- 
rency cannot  be  elastic.  It  will  be  just  as  rigid  and  inelastic 
when  based  upon  state  and  municipal  bonds  as  it  is  now. 

The  question  may  be  asked,  Why  did  we  have  a  panic  in 
the  autumn  of  1907,  and  a  general  bank  suspension  lasting 
two  months,  while  no  other  country  was  thus  afflicted,  and 


1  The  comptroller  of  the  currency,  in  his  report  for  1907,  shows 
that  the  banker's  profit  on  circulation,  after  deducting  all  expenses, 
is  only  0.95  per  cent  in  excess  of  the  profit  he  could  get  by  lending  at 
6  per  cent  the  money  invested  in  the  deposited  bonds. 


PRESENT   PROBLEMS  '  42/ 

even  our  neighbors  in  Canada  avoided  the  cataclysm  ?  The 
trade  conditions  of  Canada  were  akin  to  our  own,  if  not 
worse,  and  she  is  now  suffering  the  consequences  of  specu- 
lation and  trade  reaction,  but  without  becoming  like  our- 
selves "an  international  financial  nuisance."  The  reason  is 
not  far  to  seek.    Canada  has  a  credit  system 

No  Panic  in  under  which  the  banks  have  no  motive  for 

Foreign  Countries     ,      ,     .  rr., 

in  1907.  depletmg  each   other  s  reserves.     There   are 

thirty-five  banks  in  the  Dominion,  with  1841 
branches,  situated  in  10 16  towns.  None  of  the  branch  banks 
can  make  a  run  on  its  parent  bank.  None  of  the  parent 
banks  would  make  a  run  on  the  others  even  if  it  could,  be- 
cause a  common  interest  binds  them  together,  and  they  are 
not  too  numerous  to  have  a  common  understanding.  As  they 
do  not  make  runs  on  each  other  the  public  do  not  make 
runs  on  them.  In  England,  France,  Germany,  and  the  other 
European  countries,  the  bank  reserves  are  even  more  scien- 
tifically guarded  and  husbanded.  The  ultimate  cash  reserve 
in  each  country  is  in  one  central  bank.^  No  inferior  bank 
in  any  crisis  will  draw  more  from  the  central  bank  than  it 
really  needs.  No  individual  will  draw  from  it  more  than  he 
wants  to-day,  for  fear  that  he  may  not  be  able  to  get  it  to- 
morrow or  next  week.   What  happens  among  us  when  a  panic 

1  Mr.  F.  S.  Mead,  in  the  Quarterly  Jourttal  of  Economics  (May,  1907), 
gives  a  computation  of  the  ultimate  cash  reserves  held  in  the  United 
States,  Canada,  and  Great  Britain,  consolidating  the  institutions  of 
all  kinds,  in  each  country,  that  do  a  banking  business.  Thus  the 
banks  in  the  United  States,  national,  state,  and  private,  are  treated 
as  a  whole,  the  deposits  which  they  make  with  each  other  being  elimi- 
nated. The  liabilities  of  the  banks  to  the  public,  including  that  of 
circulating  notes  and  government  deposits,  in  November,  1906,  were 
approximately  ^9,945,615,713,  and  the  cash  in  hand,  ^969,904,523  or 
9.73  per  cent.  But  assuming  that  ^25,000,000  of  the  reserves  of  state 
banks  and  trust  companies  consisted  of  national  bank  notes  which 
cannot  be  termed  cash,  the  reserve  would  be  reduced  to  9,^  per  cent. 
The  national  banks  alone  held  13.39  per  cent  against  individual  and 


428  BANKING 

comes  was  thus  described  by  a  witness  of  all  the  panics  that 
have  visited  us  since  the  New  York  Clearing  House  was 
organized :  ^ 

By  far  the  largest  cause  of  currency  hoarding  is  the  fact  that 
the  banks  throughout  the  country  all  proceed  to  fortify  themselves. 
There  are  6600  national  banks,  all  of  them  outside  of  New  York, 
hoarding  centers,  —  I  will  not  say  all  of  them,  but  the  majority  of 
them,  hoarding  centers,  —  dominated  by  an  idea  of  self-preserva- 
tion, each  seeking  to  fortify  its  own  reserves.  And  why  is  that? 
Simply  because  there  is  no  central  agency  of  rehef  to  which  they 
can  apply  for  help  in  time  of  trouble.  Every  banker  feels  that  he 
must  stand  alone. 

These  facts  emphasize  the  advantages  of  a  central  bank 
like  those  of  Europe,  or  a  system  of  branch  banks  like  those 
of  Canada  and  of  Scotland,  as  a  preventive  of  bank  suspen- 
sion.    But  in  every  case  where  branch  banking  has  achieved 

great  success  it  has  been  coupled  with  sub- 
Branch  Banks.  •   -i   r        ^  r  •  tt 

stantial  freedom  or  note  issue.  However  use- 
ful it  may  be  as  a  means  of  economizing  cash  reserves,  it  is 
still  more  so  as  an  instrument  of  credit.  A  Scotch  bank  with 
one  hundred  branches  does  not  divide  its  cash  reserve  into 
one  hundred  parts.    It  lends  its  notes  at  the  branches  and 

government  deposits  and  circulation.  The  state  banks  and  trust 
companies  held  6.35  per  cent  and  the  private  banks  5.24  per  cent. 

The  reserves  of  the  Canadian  banks  against  circulation  and  de- 
posits at  the  same  period  (1906)  were  9.09  per  cent  cash  in  hand,  but 
10.88  per  cent  if  we  count,  as  is  proper,  their  deposit  balances  in 
banks  in  foreign  countries. 

The  ultimate  banking  reserve  of  Great  Britain  was  found  by 
Mr.  Mead  to  be  7.6  per  cent,  counting  Bank  of  England  notes  as 
cash,  or  6.5  per  cent  in  specie  alone.  The  reserve  of  the  joint  stock 
banks  was  only  5.5  per  cent  in  specie  and  bank  notes  together,  or  3.8 
percent  in  specie  alone. 

1  Testimony  of  Alexander  Gilbert  before  the  House  Committee  on 
Banking  and  Currency,  April  13,  1908. 


PRESENT  PROBLEMS  429 

redeems  them  at  the  head  office.  A  multiplicity  of  reserves 
is  dispensed  with,  local  redemption  is  unnecessary.  Economy 
of  capital,  of  time,  and  of  labor  are  here  conjoined,  but  this 
would  not  be  possible  without  practical  freedom  of  note 
issue.    A  Canadian  bank  may  receive  deposits  in  Halifax 

to-day  and  lend  them  in  Winnipeg  to-morrow, 
^o^wotf  Issues'       because  it  can  issue  its  notes  promptly  at  the 

latter  place.  If  it  were  obliged  to  wait  till  it 
could  transmit  the  money  from  Halifax  by  express,  time  and 
interest  would  be  lost.  If  it  could  not  issue  its  own  notes 
without  first  buying  bonds,  lodging  them  in  a  government 
office,  and  "  taking  out "  currency,  the  entire  profit  of  the 
loan  might  be  dissipated. 

The  questions  whether  the  law  ought  to  fix  a  minimum 
cash  reserve  for  banks,  and  if  so  what  the  reserve  should 
consist  of,  are  occasionally  brought  into  debate.  The  United 
States  is  the  only  country  which  requires  a  fixed  percentage 
of  reserve  and  this  is  only  for  national  banks.  Ordinarily, 
however,  the  national  banks  keep  a  larger  reserve  than  the 

law  prescribes,  and  the  country  banks  fre- 
R^serve^^^  quently  keep  a  larger  percentage  than  those 

of  the  cities,  although  their  legal  requirement 
is  less.  Therefore  it  cannot  be  said  at  the  present  time  that 
the  law  is  a  hardship  to  any  class.  Among  thousands  of 
banks  scattered  over  a  wide  territory  there  will  always  be 
some  reckless  or  ignorant  or  unprincipled  managers  who,  in 
their  eagerness  for  profit,  will  allow  their  reserves  to  fall 
below  the  danger  point.  In  other  kinds  of  business  the 
penalty  of  bankruptcy  is  the  most  fitting  end  to  recklessness 
in  business,  but  in  the  banking  world  a  fire  once  started  is 
apt  to  spread  rapidly.  One  failure  begets  others  and  may 
bring  ruin  upon  a  whole  community.  Therefore  the  legal 
reserve  provision  of  our  national  bank  act  must  be  con- 
sidered wise  under  present  conditions. 


430  BANKING 

Should  a  bank  be  allowed  to  count  the  notes  of  other 
banks  as  a  part  of  its  cash  reserve  ?  Nobody  would  think 
of  allowing  a  bank  to  count  its  own  notes,  which  are  its 
debts,  as  a  part  of  its  cash.  Obviously,  then,  it  would  not 
be  wise  to  allow  two  banks  to  count  each  other's  notes  as 

reserves.  Such  a  result  might  be  achieved  by 
Reserves*^^^^       simply  exchanging  notes,  and  then  they  might 

report  full  reserves  when  they  had  no  real  cash 
at  all.  This  would  be  an  infraction  of  law,  but  if  there  were 
sufficient  motive  for  it,  ways  for  concealing  it  could  be  easily 
devised.  Indeed,  it  is  a  common  belief  among  bankers  that 
the  reserves  consist  in  part  of  national  bank  notes  now, 
which  are  included  in  the  mass  of  reserves  in  order  to  avoid 
the  trouble  of  sorting  them  out  and  sending  them  to  Wash- 
ington for  redemption.  It  is  most  desirable  that  they  should 
be  so  sent,  since  it  prevents  stagnation  of  the  note  currency. 
It  compels  each  bank  to  keep  its  assets  in  a  liquid  state,  so 
that  it  may  always  have  the  means  of  redemption  in  legal 

tender  at  hand.    Under  the  Suffolk  system  the 

r^'^n?*^^?!"'^"  bank  notes  of  the  New  England  states  were 
tion  Desirable.  * 

redeemed,  on  the  average,  ten  times  each 
year ;  and  there  can  be  no  doubt  that  the  spur  of  frequent 
redemption  was  a  most  potent  aid  to  sound  banking.  Our 
national  bank  act  needs  amendment  in  its  note-issuing 
feature,  not  in  the  direction  of  making  redemption  more 
sluggish  than  it  now  is,  but  the  contrary.  Elasticity  of  the 
note  circulation,  which  was  so  marked  under  the  Suffolk 
system  and  which  prevails  in  Scotland  and  in  Canada,  re- 
quires frequent  redemption  of  note  issues.  Expansion  of  the 
currency,  when  need  arises,  implies  contraction  when  it  has 
passed  away.  The  one  process  is  the  complement  of  the 
other. 

Advocates  of  the  policy  of  allowing  national  banks  to 
count  each  other's  notes  as  cash  reserves  point  to  the  fact 


PRESENT   PROBLEMS  43 I 

that  state  banks  are  authorized  by  law  to  use  them  as  such 
in  New  York  and  in  some  other  states.  The  answer  is  that 
a  bad  practice  ought  not  to  be  extended.  The  state  laws 
ought  to  be  changed  in  this  particular  so  that  nothing  but 
money  of  full  legal  tender  should  be  used  as  bank  reserves, 
and  preferably  gold.  It  is  true  that  Bank  of  England  notes 
are  counted  as  reserves  in  Great  Britain,  but  they  are  legal 
tender  and  are  now  issued  by  the  bank  only  in  exchange 
for  gold. 

Most  of  the  plans  proposed  for  an  elastic  note  system 
provide  for  a  special  tax  on  what  is  called  "  emergency  cir- 
culation." This  is  a  misleading  phrase.  It  im- 
chcviilSm^'  plies  that  there  is  a  fixed  standard  of  quantity 
in  bank-note  circulation,  regardless  of  the 
state  of  trade,  and  that  any  demand  for  notes  above  that 
sum  is  an  emergency.^  If  that  were  true  it  would  constitute 
no  reason  for  imposing  an  extra  tax  on  the  currency  issued 
to  meet  it,  since  the  tax  would  tend  to  defeat  the  very  pur- 
pose for  which  it  was  issued.    It  is  said  that  the  tax  is 

1  Mr.  James  B.  Forgan,  in  his  testimony  before  the  House  Commit- 
tee on  Banking  and  Currency,  gave  an  additional  reason  for  discarding 
the  phrase  "  emergency  currency,"  in  answer  to  a  question  put  to  him 
by  Mr.  Prince  of  Illinois,  thus: 

"  Mr.  Prince.  Do  you  think  there  is  now  need  of  emergency  cur- 
rency legislation  ? 

"  Mr.  Forgan.    I  do  not ;  and  I  do  not  think  that  a  condition  can 

ever  exist  in  this  country  or  any  other  country  that  will  warrant  the 

use  of  the  issue  of  anything  that  could  bear  such  a 
' '  Wh3.t '  s  in  3.  JO 

terrifying  name  as  'emergency  currency,'  because  as 

soon  as  you  use  it,  and  you  say  that  a  single  bank 
has  issued  emergency  currency,  you  have  got  the  whole  of  your  deposi- 
tors on  your  back.  Now,  suppose  that  emergency  does  exist ;  if  they 
believe  an  emergency  exists,  they  will  do  as  they  have  always  done, 
—  run  on  the  banks.  A  proper  currency  prevents  any  such  thing  as 
an  emergency  ever  getting  into  the  minds  of  the  public.  They  never 
know  that  an  emergency  exists." 


432  BANKING 

intended  to  prevent  inflation,  by  driving  the  notes  home 
when  they  are  no  longer  needed.  But  there  is  no  way  to 
determine  when  inflation  exists  except  by  the  return  of  the 

notes  to  the  issuing  banks.  An  emergency 
Tax    ^^°^^  exists  when  there  is  a  demand  on  the  banks 

for  additional  notes.  Inflation  exists  when  the 
reverse  process  sets  in.  There  is  no  other  criterion.  A  tax 
to  prevent  inflation  is  a  superfluity. 

The  German  bank  law  imposes  a  tax  at  the  rate  of  5  per 
cent  on  circulating  notes  of  the  Reichsbank  in  excess  of  the 
cash  reserve,  but  the  tax  is  not  imposed  for  the  purpose 
of  sending  the  notes  home.    This  is  made  clear  by  the  fact 

that  the  notes  are  generally  loaned  at  a  less 
PracSe"^"  rate  of  interest  than  the  tax  itself — frequently 

at  rates  ranging  from  3  to  4^  per  cent.  In  the 
period  from  January  i,  1901,  to  July  7,  1906,  there  were 
thirty-seven  occasions  of  overissue.  In  only  twelve  of  these 
cases  was  the  interest  rate  as  high  as  the  tax,  while  there 
were  twenty-five  when  it  was  lower  than  the  tax.  Such 
emergencies  in  Germany  come  and  go  before  the  public 
are  aware  of  them. 


CHAPTER  XXI 
THE  CENTRAL  BANK  QUESTION 

Looking  at  the  past  we  find  that  we  have  had  an  average 
of  one  general  bank  suspension  for  each  decade  since  1837, 
while  Europe  has  had  none  during  the  past 
S'crfdS*'^''  fifty  years,  except  those  due  to  non-financial 
causes,  such  as  wars  or  the  action  of  govern- 
ments. The  saving  quality  of  the  European  methods  con- 
sists in  the  fortification  of  credit  by  a  central  bank. 

Business  conditions  in  the  United  States  in  1907  were 
similar  to  those  prevailing  in  other  civilized  countries,  but 
our  resources  were  greater  in  the  aggregate  than  those  of 
any  other.  This  is  proved  by  the  fact  that  we  were  able  to 
draw  $107,000,000  of  gold  from  the  world's  supply  in  the 
short  space  of  two  months  by  bills  of  exchange  drawn 
against  our  current  exports.    Yet  we  alone  suspended. 

The  central  bank  of  the  Old  World  type  is  a  bank  of  banks. 
Its  primary  function  is  to  rediscount  bills  of  exchange  which 
have  their  origin  in  various  parts  of  the  country  and  which 
pass  through  inferior  banks  whose  indorse- 
L\Trai°Bank^  ment  they  bear.  These  bills  of  exchange 
must  be  backed  by  two  or  more  names  of  un- 
doubted solvency,  must  run  not  more  than  ninety  days,  and 
must  represent  actual  business  transactions.  All  bills  of  this 
kind  will  be  discounted  by  the  central  bank,  which  will  give 
in  exchange  cash,  or  its  own  notes  redeemable  in  gold  on 
demand.  The  bank  does  not  incur  a  deposit  liability  in  the 
act  of  discounting  bills. 

The  bank  also  makes  advances,  in  the  discretion  of  the 
managers,  on  goods  unsold  and  on  securities,  but  not  as  a 

433 


434  BANKING 

matter  of  course,  and  not  to  an  unlimited  amount.     Such 

advances  are  placed  in  a  different  category  from  that  of  bills 

of  exchange. 

The  power  of  note  issue  is  granted  to  the  central  bank  in 

Germany  on  condition  that  it  shall  hold  a  cash  reserve  of 

not  less  than  7,^  per  cent  against  the  same.   All  the  revenues 

of  the  government  are  deposited  in  the  bank, 

Its  Note  Issues.  ,.*',.,  ^  ,      ,  ,  ' 

and  Its  disbursements  are  made  by  checks 

drawn  on  the  bank.  The  shareholders  of  the  bank  are  pri- 
vate individuals.  In  Germany  the  bank  is  managed  by  the 
government;  in  France  by  the  government  and  the  share- 
holders together,  the  government  being  supreme;  in  Eng- 
land by  the  shareholders  alone. 

The  issue  of  the  bank's  notes,  as  above  described,  takes 
place  in  obedience  to  the  demands  of  business  and  simul- 
taneously therewith.     The  notes  return  to  the  bank  in  pay- 
ment of  maturing  bills,  or  as  deposits  at  the 

Drainson  head  bank  or  its  branches.    Thus  the  credit 

Bank  Reserves. 

of  the  country  is  organized  to  carry  on  the 
business  of  the  country  with  the  minimum  of  cash.  The  cur- 
rency is  perfectly  elastic.  No  inferior  bank  and  no  indi- 
vidual has  any  motive  to  draw  on  the  reserves  of  the  central 
bank  for  purposes  of  internal  trade.  No  drain  upon  those 
reserves  can  take  place  except  when  gold  is  wanted  for  ex- 
port. In  such  cases,  if  the  drain  becomes  heavy,  the  bank 
raises  the  rate  of  discount  till  it  ceases. 

Drains  on  the  bank  reserves  in  the  United  States  usually 
run  in  the  contrary  direction.  They  are  internal,  not  exter- 
nal. In  the  recent  panic  the  depletion  of  bank  reserves  was 
most  violent  while  we  were  importing  gold  from  abroad. 
The  country  banks  were  draining  the  city  banks.  Mr.  J. 
B.  Forgan^  said  that  during  the  week  before  the  28th  of 

1  Testimony  before  the  House  Committee  on  Banking  and  Cur- 
rency, April  15,  1908. 


The  central  bank  question  43^ 

October  the  First  National  Bank  of  Chicago  alone  shipped 

$7,000,000  out  of  a  legal  reserve  fund  of  $15,000,000  "for 

the  purpose  of  taking  care  of  country  banks  who  feared  that 

there  was  going  to  be  a  panic   and  made  a 

How  Banks  drain  ^jj-ive  at  the  nearest  reserve  city  they  had." 
Each  Other  in  the  ,  •  i      i  , 

United  States.       This  was  before  private  depositors  had  made 

any  run  on  the  banks  at  all.  Twelve  thousand 
small  banks  were  drawing  simultaneously  from  the  large 
banks  of  the  reserve  cities,  reducing  the  big  piles  of  cash 
that  the  public  were  accustomed  to  see  reported  in  the  news- 
papers, and  accumulating  twelve  thousand  small  piles  that 
the  public  never  saw  or  heard  of.  No  wonder  if  the  private 
depositors  took  the  alarm  also. 

A  central  bank  of  issue  exists  primarily  in  order  to  keep 

the  internal  industry  and  barter  of  the   country  going  on 

with  the  least  possible  friction,  by  supplying 

The  Purpose  of  a    j^gt  the   amount  of  currency  needed   at  all 

Central  Bank  \  ,   ,  .         .  •  ,  ,  ,        -r     • 

of  Issue.  times  and  keeping  it  at  par  with  gold.     It  is 

no  part  of  its  aim  to  supply  capital  to  stock- 
brokers or  speculators,  but  it  may  properly  use  for  that  pur- 
pose any  surplus  which  it  has  on  hand,  in  order  to  avoid  a 
loss  of  interest  for  the  time  being.  Neither  a  central  bank 
of  issue  nor  any  number  of  banks  can  put  out  or  keep  out 
more  notes  than  the  country  needs  for  hand-to-hand  circu- 
lation. Any  surplus  will  come  back  promptly  and  inevitably 
for  redemption.  Therefore  no  bank  and  no  number  of  banks 
can,  during  a  period  of  general  inflation,  supply  the  demands 
of  speculators  by  fresh  issues  of  bank  notes,  whether  the 
notes  are  secured  or  unsecured.  Nothing  but  bank  reserves 
of  actual  cash  will  answer  that  purpose. 

It  may  be  asked  how  we  shall  be  secured  against  favorit- 
ism in  the  matter  of  discounts.  Will  not  the  central  bank 
extend  its  favors  to  some  customers  and  withhold  them  from 
others  ?  The  central  bank,  of  the  Old  World  type,  discounts 
all  the  paper  offered  to  it  that  measures  up  to  its  standard 


43^  BANKING 

of  goodness.  Why  should  it  refuse  any  ?  If  its  legal  limit 
of  note  issue  has  been  reached,  it  is  only  necessary  to  buy 
thirty-three  dollars  of  gold  for  each  one  hundred  dollars  of 
new  bills  discounted.  Then  it  receives  inter- 
Favwitism  °^  ^^^  ^"  ^^^  whole  one  hundred  and  pays  interest 
only  on  the  thirty-three.  There  is  no  motive 
for  favoritism  and  discrimination  between  persons  and  local- 
ities offering  the  same  kind  of  bills.  The  only  discrimina- 
tion possible  is  between  good  paper  and  bad,  between  that 
which  arises  from  mercantile  transactions  and  that  which 
results  from  kiteflying.  The  danger  is  not  that  the  central 
bank  would  discriminate  by  extending  its  favors  to  some 
banks  and  not  to  others,  but  that  there  would  not  be  a  suffi- 
cient amount  of  bills  of  the  type  demanded  to  employ  the 
resources  of  a  central  bank  of  ^50,000,000  capital. 

Apparent  obstacles  to  the  adoption  of  the  central  bank 
system  in  this  country  are  twofold :  first,  the  wide  extent  of 
the  territory  to  be  served ;  second,  the  habits  of  our  people, 
who  are  accustomed  to  a  system  based  upon 
Bank  F^a^^bie  ?  individualism.  Are  these  difficulties  insuper- 
able ?  The  Second  Bank  of  the  United  States 
and  President  Jackson's  war  against  it  will  doubtless  occur 
to  readers  as  a  warning  against  fresh  experiments  of  that 
kind.  But  President  Jackson  had  no  objection  to  a  bank 
controlled  by  the  government.  In  fact  he  recommended 
one  to  Congress  at  the  time  when  he  was  fighting  against 
"  Biddle's  bank."  Our  habit  of  falling  prostrate  once  in 
every  ten  years,  and  exposing  ourselves  to  the  jeers  of  man- 
kind, is  the  worst  banking  habit  we  have,  and  the  one  which 
we  could  most  advantageously  lay  aside. 

Most  of  the  plans  for  banking  reform  now  or  lately  under 
discussion  contemplate  the  cooperation  of  banks  in  a  certain 
number  of  geographical  units.  The  aim  is  to  bind  them 
together  like  the  bundle  of  sticks  with  which  the  old  man  in 
the  fable  instructed  his  sons.     The  idea  is  an  outgrowth  of 


THE  CENTRAL  BANK   QUESTION  43/ 

the    clearing-house  association.    It    seeks   to   utilize    the   same 
for  other  purposes  than   that  of  clearing.    It  is   the  nucleus 
of  the  bill  passed  by  Congress,  May  30,  1908. 
ofun^on^^^  Thus  the  country  has  turned  its  face   toward 

centralization,  and  the  question  is  whether  public 
opinion  is  prepared  to  go  farther  in  the  same  direction. 
.   The  chairman  of  the  National  Monetary  Commission,  ap- 
pointed in  pursuance  of  the  act  of  Congress  aforesaid  (Honor- 
able Nelson  W.  Aldrich),  has  made  suggestions 
The  Aldrich  Plan.    ^  .  ,        ,.^      ,  .  •         T    , 

for  overcommg  the  difficulties  mentioned  above. 

He  is  of  the  opinion  that  the  present  national  banking  law  has 
become  obsolete  and  that  it  ought  to  be  modernized.  To  this 
end  he  has  submitted  to  the  Commission  the  outline  of  a  plan 
for  betterment.-^ 

The  essential  feature  of  it  is  the  establishment  of  a  banking 
institution,  which  is  to  be  the  fiscal  agent  of  the  government, 
with  a  capital  not  exceeding  $300,000,000.  It  is  to  be  called 
"  The  Reserve  Association  of  America."  Its 
Assodation^^  stock  may  be  subscribed  for  and  owned  solely 
by  the  national  banks  of  the  United  States,  in 
exact  proportion  to  their  capital,  and  is  not  to  be  transferable.  The 
principal  office  of  the  association  is  to  be  at  Washington  City. 
The  earnings  are  to  be  paid  to  the  stockholders  at  first,  to  the 
extent  of  4  per  cent,  and  subsequently  to  the  extent  of  5  per 
cent,  on  the  paid-in  capital,  all  other  earnings  to  go  to  the  govern- 
ment.   No  bank  will  be  compelled  to  join  the  association. 

All  subscribing  banks  will  be  required  to  group  themselves 

in  local  associations,  each  association  to  have  not  less  than  ten 

banks  with  an  aggregate  capital  of  not  less  than 

Local  Associa-  ft e  000,000.  All  the  local  associations  are  to 
tions.  '^•^'         '  ^- 

group    themselves    into   fifteen   divisions  called 

districts.    Each  local  association  shall  elect  annually  a  board  of 

directors,  three-fifths  of  which  are  to  be  elected  by  each  bank 

1  See  Appendix  B. 


438  BANKING 

having  one  representative  and  one  vote,  without  reference  to 

the  size  of  the  bank. 

There  shall  be  a  branch  of  the  Reserve  Association  in  each 

of  the  fifteen  districts,  and  this  branch  shall  be  governed  by  a 

board  of  directors  chosen  by  the  local  associa- 
Branches.  .         ,       ,.      .  .  ^  ,•  •        .    -,• 

tions  composing  the  district.   Additional  directors 

equal  to  one-third  the  number  of  the  local  associations  shall  be 
appointed  to  represent  the  business  interests  of  the  locality, 
other  than  the  banking  interests. 

The  Reserve  Association  shall  be  controlled  by  a  board  of 
forty-five  directors.  Six  of  these  shall  consist  of  the  governor, 
two  deputy  governors,  the  Secretary  of  the  Treasury,  the  Secre- 
tary of  Commerce  and  Labor,  and  the  Comp- 
troller of  the  Currency.  The  remainder  are  to 
be  chosen  by  the  branches  and  the  local  associations.  The  gov- 
ernor and  two  deputy  governors  are  to  be  selected  by  the  Pres- 
ident of  the  United  States  from  a  list  submitted  by  the  board 
of  directors.  Each  branch  shall  have  a  manager  and  a  deputy 
manager  appointed  by  the  governor  with  the  approval  of  an 
executive  committee  of  the  central  board  of  directors. 

The  government  of  the  United   States   and   those  national 

banks  owning  stock  in  the  Reserve  Association  shall  be  the  sole 

depositors  in  said  association,  and  the  business 

Restrictions.  r  •  ^  i       n    i  n  ^  1 

01  said  association  shall  be  conhned  to  the  gov- 
ernment and  the  subscribing  banks.  The  Reserve  Association 
may  rediscount  any  commercial  paper  bearing  the  indorsement 
of  any  bank  having  a  deposit  with  it,  provided  said  paper  was 
made  thirty  days  prior  to  the  date  of  rediscount  and  has  not 
more  than  twenty-eight  days  still  to  run.  It  may  also  rediscount 
for  any  depositing  bank  any  paper  arising  out  of  commercial 

transactions  running  not  more  than  four  months, 

Rediscounts.  i  i        i      ,       , 

but  such  paper  must  be  guaranteed  by  the  local 

association  of  which  the  bank  asking  rediscount  is  a  member. 

Any  member  of  a  local  association  may  apply  to  that  association 


THE   CENTRAL  BANK   QUESTION  439 

for  a  guaranty  of  the  commercial  paper  which  it  desires  to  re- 
discount. The  total  amount  of  guaranties  by  a  local  association 
^hall  not  exceed  the  aggregate  capital  and  surplus  of  the  banks 
forming  the  local  association. 

The  Reserve  Association  may  also  in  certain  cases  discount 
the  direct  obligation  of  a  depositing  bank  when  accompanied  by 
satisfactory  securities,  the  loan  not  to  exceed  two-thirds  of  the 

actual  value  of  the  pledged  securities.  The  Re- 
other  Discounts.  ^  .     .         ,    „  .  1 

serve  Association  shall  pay  no  interest  on  depos- 
its. The  rate  of  discount  of  the  Reserve  Association  shall  be 
uniform  throughout  the  United  States.  The  Reserve  Associa- 
tion may  buy  from,  or  sell  to,  its  depositors  foreign  bills  of 
exchange  arising  from  commercial  transactions,  running  not 
more  than  ninety  days  and  bearing  the  signatures  of  at  least 
three  responsible  parties.  It  may  have  agencies  in  foreign  coun- 
tries. All  government  funds  are  to  be  deposited  with  the  Re- 
serve Association,  and  government  disbursements  shall  be  made 
by  drafts  or  checks  drawn  on  it. 

National  banks  may  maintain  their  existing  issues  of  circulat- 
ing notes,  but  there  shall  be  no  further  issues  beyond  those  now 
outstanding.  No  notes  voluntarily  retired  shall  be  reissued. 
The  Reserve  Association  must,  for  a  period  of  one  year,  offer 

to  purchase  at  not  less  than  par  the  2  per  cent 
Note  Issues.  ,        ,  ,    ,  ,  ,  •        1  1       1  •      r 

bonds  now  held  by  national  banks  as  security  for 

their  circulation,  with  the  currency  privilege  attached  to  said 
bonds,  and  assume  all  responsibility  for  said  notes,  it  being  the 
policy  of  the  United  States  to  retire  such  bond-secured  circula- 
tion and  to  substitute  therefor  notes  of  the  Reserve  Association 
subject  to  certain  rates  of  taxation.  All  note  issues  of  the  Re- 
serve Association  must  be  covered  to  the  extent  of  one-third 
by  gold  or  other  lawful  money,  and  the  remaining  two-thirds 
by  United  States  bonds  or  bankable  commercial  paper  of  the 
specified  kind.  The  circiilating  notes  are  to  constitute  a  first 
lien  upon  all  the  assets  of  the  Reserve  Association. 


44^  BANKING 

The  institution  here  outlined  is  fitted  to  perform  the  essential 
functions  of  a  central  bank,  although  it  bears  a  different  title. 
Probably  Reserve  Association  is  the  better  name,  since  it  in- 
dicates the  principal  object  aimed  at,  and  since  it  avoids  certain 

popular  prejudices  which  attach  to  the  other 
the'pian^^^  °*       name.    Its  first  endeavor  is   to  strengthen   the 

whole  body  of  banking  by  economizing  the  cash 
reserves  of  the  country  and  making  them  available  for  the  pro- 
tection of  banks  and  business  men  at  all  times,  and  especially 
in  squally  times.  Once  put  in  operation,  there  will  be  no  motive 
for  banks  to  make  runs  on  each  other,  or  for  depositors  to  make 
runs  on  the  banks.  The  plan  contemplates  the  refunding  of  the 
present  2  per  cent  bonds  into  3  per  cents,  in  a  way  which  will 
allow  the  Reserve  Association  to  dispose  of  its  bonds  and  so 
eventually  get  rid  of  the  bond  basis  of  our  circulation.  It  aims 
also  to  supply  a  discount  market,  which  shall  be  an  unfailing 
resource  for  all  commercial  paper  which  measures  up  to  the 
established  standard,  and  a  flexible  currency  to  be  based  even- 
tually upon  general  banking  assets,  and  the  substitution  for  the 
present  independent  Treasury  system  of  an  automatic  method 
of  returning  the  government's  surplus  revenue  to  the  money 
market  from  day  to  day. 

The  new  system  will  not  prevent  trade  reactions.  It  will  not 
prevent  the  bursting  of  bubbles  of  speculation  when  overblown, 
but  it  will  probably  have  a  steadying  influence  by  standardizing 
the  commercial  paper  admitted  to  discount,  by  inducing  mutual 

supervision  of  the  banks  in  the  local  associations. 
Influence^  and  by  creating  a  higher  sense  of  responsibility 

on  the  part  of  bankers  generally.  It  will  thus 
curtail  the  fires  of  speculation  and  tend  to  keep  them  within 
limits,  instead  of  allowing  them  to  spread  through  the  commu- 
nity at  every  considerable  crisis.  Since  the  ultimate  banking 
reserve  will  be  in  the  control  of  an  institution  too  strong  to  fail, 
and  since  there  can  be  no  limit  to  the  amount  of  currency  issued 


THE  CENTRAL  BANK  QUESTION  44I 

except  the  power  to  redeem  it  on  demand,  and  no  delay  in  issu- 
ing it,  there  can  be  no  paroxysm  of  credit,  in  which  solvent  and 
insolvent  debtors  may  be  involved  in  a  common  ruin. 

The  Aldrich  plan  is  workable.  Objections  are  made  to  it  that 
such  a  colossal  institution  may  become  a  tool  of  politicians,  or 
that  it  may  fall  under  the  domination  of  a  few  individuals  in 
Wall  Street.  The  answer  is  that  it  will  be  controlled  by  the  par- 
ticipating banks  of  the  whole  country,  and  that  they  could  not 
part  with  their  shares,  even  if  they  should  desire 
si4e^ed°°^  ^°^'  ^^  ^^  ^^'  ^^^  objection  on  the  score  of  politics 
lies  equally  against  our  form  of  government,  and 
against  all  forms  of  government.  If  we  can  safely  intrust  our 
other  national  interests  to  a  President  elected  every  four  years, 
we  can  surely  trust  him  to  select  a  governor  and  two  deputy 
governors  of  the  Reserve  Association  from  a  list  of  names  sub- 
mitted to  him  by  the  directors  thereof.  This  power  of  appoint- 
ment has  been  exercised  by  the  chief  of  the  state  in  France 
more  than  one  hundred  years  under  all  governments,  —  monar- 
chial,  republican,  and  revolutionary,  —  without  harmful  conse- 
quences. Objections  based  upon  the  Bank  war  in  President 
Jackson's  time  are  groundless  by  reason  of  the  dissimilarity  of 
the  institutions  concerned,  and  of  the  attendant  circumstances. 
A  war  between  the  President  of  the  United  States  and  a  fiscal 
agency,  or  exchange  office,  owned  by  thousands  of  banks  in  all 
parts  of  the  country,  is  unimaginable.  By  way  of  keeping  the 
Reserve  Association  free  from  political  entanglement  it  is  pro- 
vided that  no  member  of  any  national  or  State  legislative  body 
shall  be  a  director  of  it,  or  of  any  of  the  branches,  or  of  any 
local  association. 

RECAPITULATION 

A  central  bank  is  the  keeper  of  the  ultimate  gold  reserve 
of  the  nation,  which  it  regulates  by  raising  or  lowering  the 
rate   of  discount.    Its   chief   function  is  the   rediscountine  of 


442  BANKING 

commercial  paper  for  other  banks.  It  organizes  credit  by  re- 
quiring that  all  paper  offered  for  discount  shall  be  sound,  and 
that  all  such  paper  offered  shall  be  discounted  at  a  uniform  rate 
of  interest.  It  has  the  power  of  note  issue  limited  only  by  its 
cash  reserve.  The  power  of  note  issue  is  not  necessarily  ex- 
clusive, but  it  has  been  found  in  practice  that  other  banks  in 
the  same  country,  which  have  that  power,  gradually  abandon  it 
without  compulsion.  The  organization  of  credit  by  means  of  a 
central  bank  of  sufficient  capital  prevents  panics  by  assuring  the 
commercial  community  that  all  persons  worthy  of  credit  can 
at  all  times  obtain  it.  A  central  bank  may  or  may  not  be  con- 
trolled by  the  government.  Its  usual  form  of  control  is  in  part 
by  the  government  and  in  part  by  private  shareholders. 


APPENDIX  A 

THE  ALDRICH-VREELAND  BILL,  OR  THE  ACT  OF 
MAY  30,  1908 

On  May  28,  1908,  the  House  of  Representatives,  after  a 
debate  of  one  hour,  passed  a  bill,  in  which  the  Senate  con- 
curred, to  amend  the  national  banking  laws.  It  had  not 
been  considered  by  any  regular  committee  of  either  branch 
of  Congress,  but  was  hastily  put  together  by  a  republican 
caucus  committee  as  a  political  rather  than  a  financial  ex- 
pedient, so  that  the  Republicans  might  be  able  to  say  in 
the  coming  campaign  that  they  had  made  provision  for  an 
"emergency  currency"  in  case  of  a  renewal  of  the  stringency 
of  the  preceding  autumn.  The  bill  consisted  of  a  part  of  a 
measure  prepared  somewhat  earlier  by  Congressman  Vree- 
land  of  New  York,  and  of  a  part  of  the  Aldrich  bill  which  had 
previously  passed  the  Senate.  It  embraces  the  principles  of 
an  **  asset  currency,"  which  neither  house  of  Congress  had 
ever  previously  accepted.  It  must  therefore  be  considered 
a  step  in  the  right  direction.  The  bill  was  signed  by  the 
President  and  is  now  a  law.  The  text  of  the  measure  follows: 

Be  it  enacted  by  the  Senate  and  House  of  Representatives  of  the 
United  States  of  A7nerica,  in  Congress  asse7nbled^  that  national 
banking  associations,  each  having  an  unimpaired  capital  and  a 
surplus  of  not  less  than  twenty  per  centum,  not  less  than  ten  in 
number,  having  an  aggregate  capital  and  surplus  of  at  least  five 
mijlions  of  dollars,  may  form  voluntary  associations  to  be  desig- 
nated as  national  currency  associations.    The  banks  uniting  to 

443 


444  APPENDIX 

form  such  association  shall,  by  their  presidents  or  vice-presidents, 
acting  under  authority  from  the  board  of  directors,  make  and 
file  with  the  Secretary  of  the  Treasury  a  certificate  setting  forth 
the  names  of  the  banks  composing  the  association,  the  principal 
place  of  business  of  the  association,  and  the  name  of  the  associa- 
tion, which  name  shall  be  subject  to  the  approval  of  the  Secre- 
tary of  the  Treasury.  Upon  the  filing  of  such  certificate  the 
associated  banks  therein  named  shall  become  a  body  corporate, 
and  by  the  name  so  designated  and  approved  may  sue  and  be 
sued  and  exercise  the  powers  of  a  body  corporate  for  the  pur- 
poses hereinafter  mentioned :  Provided^  that  not  more  than  one 
such  national  currency  association  shall  be  formed  in  any  city: 
Provided^  further^  that  the  several  members  of  such  national 
currency  association  shall  be  taken,  as  nearly  as  conveniently 
may  be,  from  a  territory  composed  of  a  State  or  part  of  a  State, 
or  contiguous  parts  of  one  or  more  States  :  and  Provided,  further, 
that  any  national  bank  in  such  city  or  territory,  having  the  quali- 
fications herein  prescribed  for  membership  in  such  national  cur- 
rency association,  shall,  upon  its  application  to  and  upon  the 
approval  of  the  Secretary  of  the  Treasury,  be  admitted  to  mem- 
bership in  a  national  currency  association  for  that  city  or  terri- 
tory, and  upon  such  admission  shall  be  deemed  and  held  a  part 
of  the  body  corporate,  and  as  such  entitled  to  all  the  rights  and 
privileges  and  subject  to  all  the  liabilities  of  an  original  mem- 
ber: and  Provided,  further,  \}(\2X  each  national  currency  associa- 
tion shall  be  composed  exclusively  of  banks  not  members  of  any 
other  national  currency  association. 

The  dissolution,  voluntary  or  otherwise,  of  any  bank  in  such 
association  shall  not  affect  the  corporate  existence  of  the  asso- 
ciation unless  there  shall  then  remain  less  than  the  minimum 
number  of  ten  banks  :  Provided,  however,  that  the  reduction  of 
the  number  of  said  banks  below  the  minimum  of  ten  shall  not 
affect  the  existence  of  the  corporation  with  respect  to  the  asser- 
tion of  all  rights  in  favor  of  or  against  such  association.  The 
affairs  of  the  association  shall  be  managed  by  a  board  consisting 
of  one  representative  from  each  bank.  By-laws  for  the  govern- 
ment of  the  association  shall  be  made  by  the  board,  subject  to 


THE  ALDRICH-VREELAND   BILL  445 

the  approval  of  the  Secretary  of  the  Treasury.  A  president,  vice- 
president,  secretary,  treasurer,  and  an  executive  committee  of  not 
less  than  five  members,  shall  be  elected  by  the  board.  The  powers 
of  such  board,  except  in  the  election  of  officers  and  making  of 
by-laws,  may  be  exercised  through  its  executive  committee. 

The  national  currency  association  herein  provided  for  shall 
have  and  exercise  any  and  all  powers  necessary  to  carry  out  the 
purposes  of  this  section,  namely,  to  render  available,  under  the 
direction  and  control  of  the  Secretary  of  the  Treasury,  as  a  basis 
for  additional  circulation  any  securities,  including  commercial 
paper,  held  by  a  national  banking  association.  For  the  purpose 
of  obtaining  such  additional  circulation,  any  bank  belonging  to 
any  national  currency  association,  having  circulating  notes  out- 
standing secured  by  the  deposit  of  bonds  of  the  United  States  to 
an  amount  not  less  than  forty  per  centum  of  its  capital  stock,  and 
which  has  its  capital  unimpaired  and  a  surplus  of  not  less  than 
twenty  per  centum,  may  deposit  with  and  transfer  to  the  associa- 
tion, in  trust  for  the  United  States,  for  the  purpose  hereinafter 
provided,  such  of  the  securities  above  mentioned  as  may  be  satis- 
factory to  the  board  of  the  association.  The  officers  of  the  asso- 
ciation may  thereupon,  in  behalf  of  such  bank,  make  application 
to  the  Comptroller  of  the  Currency  for  an  issue  of  additional 
circulating  notes  to  an  amount  not  exceeding  seventy-five  per 
centum  of  the  cash  value  of  the  securities  or  commercial  paper 
so  deposited.  The  Comptroller  of  the  Currency  shall  immedi- 
ately transmit  such  application  to  the  Secretary  of  the  Treasury 
with  such  recommendation  as  he  thinks  proper,  and  if,  in  the 
judgment  of  the  Secretary  of  the  Treasury,  business  conditions 
in  the  locality  demand  additional  circulation,  and  if  he  be  satis- 
fied with  the  character  and  value  of  the  securities  proposed  and 
that  a  lien  in  favor  of  the  United  States  on  the  securities  so 
deposited  and  on  the  assets  of  the  banks  composing  the  associa- 
tion will  be  amply  sufficient  for  the  protection  of  the  United 
States,  he  may  direct  an  issue  of  additional  circulating  notes  to 
the  association,  on  behalf  of  such  bank,  to  an  amount  in  his  dis- 
cretion, not,  however,  exceeding  seventy-five  per  centum  of  the 
cash  value  of  the  securities  so  deposited :  Provided^  that  upon  the 


446  APPENDIX 

deposit  of  any  of  the  State,  city,  town,  county,  or  other  munici- 
pal bonds,  of  a  character  described  in  section  three  of  this  Act, 
circulating  notes  may  be  issued  to  the  extent  of  not  exceeding 
ninety  per  centum  of  the  market  value  of  such  bonds  so  deposited  : 
and  Provided,  further^  that  no  national  banking  association  shall 
be  authorized  in  any  event  to  issue  circulating  notes  based  on 
commercial  paper  in  excess  of  thirty  per  centum  of  its  unimpaired 
capital  and  surplus.  The  term  "  commercial  paper"  shall  be  held 
to  include  only  notes  representing  actual  commercial  transactions, 
which  when  accepted  by  the  association  shall  bear  the  names  of 
at  least  two  responsible  parties  and  have  not  exceeding  four 
months  to  run. 

The  banks  and  the  assets  of  all  banks  belonging  to  the  asso- 
ciation shall  be  jointly  and  severally  liable  to  the  United  States 
for  the  redemption  of  such  additional  circulation  ;  and  to  secure 
such  liabiHty  the  lien  created  by  section  fifty-two  hundred  and 
thirty  of  the  Revised  Statutes  shall  extend  to  and  cover  the  assets 
of  all  banks  belonging  to  the  association,  and  to  the  securities 
deposited  by  the  banks  with  the  association  pursuant  to  the  pro- 
visions of  this  Act ;  but  as  between  the  several  banks  composing 
such  association  each  bank  shall  be  liable  only  in  the  proportion 
that  its  capital  and  surplus  bears  to  the  aggregate- capital  and 
surplus  of  all  such  banks.  The  association  may,  at  any  time, 
require  of  any  of  its  constituent  banks  a  deposit  of  additional 
securities  or  commercial  paper,  or  an  exchange  of  the  securities 
already  on  deposit,  to  secure  such  additional  circulation  ;  and  in 
case  of  the  failure  of  such  bank  to  make  such  deposit  or  exchange 
the  association  may,  after  ten  days'  notice  to  the  bank,  sell  the 
securities  and  paper  already  in  its  hands  at  public  sale,  and 
deposit  the  proceeds  with  the  Treasurer  of  the  United  States  as 
a  fund  for  the  redemption  of  such  additional  circulation.  If  such 
fund  be  insufficient  for  that  purpose  the  association  may  recover 
from  the  bank  the  amount  of  the  deficiency  by  suit  in  the  circuit 
court  of  the  United  States,  and  shall  have  the  benefit  of  the  lien 
hereinbefore  provided  for  in  favor  of  the  United  States  upon  the 
assets  of  such  bank.  The  association  or  the  Secretary  of  the 
Treasury   may  permit  or  require   the    withdrawal   of   any  such 


THE  ALDRICH-VREELAND   BILL  44/ 

securities  or  commercial  paper  and  the  substitution  of  other 
securities  or  commercial  paper  of  equal  value  therefor. 

Sec.  2.  That  whenever  any  bank  belonging  to  a  national 
currency  association  shall  fail  to  preserve  or  make  good  its  re- 
demption fund  in  the  Treasury  of  the  United  States,  required  by 
section  three  of  the  Act  of  June  twentieth,  eighteen  hundred  and 
seventy-four,  chapter  three  hundred  and  forty-three,  and  the  pro- 
visions of  this  Act,  the  Treasurer  of  the  United  States  shall  notify 
such  national  currency  association  to  make  good  such  redemption 
fund,  and  upon  the  failure  of  such  national  currency  association 
to  make  good  such  fund,  the  Treasurer  of  the  United  States  may, 
in  his  discretion,  apply  so  much  of  the  redemption  fund  belonging 
to  the  other  banks  composing  such  national  currency  association 
as  may  be  necessary  for  that  purpose  ;  and  such  national  currency 
association  may,  after  five  days'  notice  to  such  bank,  proceed  to 
sell  at  public  sale  the  securities  deposited  by  such  bank  with  the 
association  pursuant  to  the  provisions  of  section  one  of  this  Act, 
and  deposit  the  proceeds  with  the  Treasurer  of  the  United  States 
as  a  fund  for  the  redemption  of  the  additional  circulation  taken 
out  by  such  bank  under  this  Act. 

Sec.  3.  That  any  national  banking  association  which  has 
circulating  notes  outstanding,  secured  by  the  deposit  of  United 
States  bonds  to  an  amount  of  not  less  than  forty  per  centum  of 
its  capital  stock,  and  which  has  a  surplus  of  not  less  than  twenty 
per  centum,  may  make  application  to  the  Comptroller  of  the 
Currency  for  authority  to  issue  additional  circulating  notes  to  be 
secured  by  the  deposit  of  bonds  other  than  bonds  of  the  United 
States.  The  Comptroller  of  the  Currency  shall  transmit  immedi- 
ately the  application,  with  his  recommendation,  to  the  Secretary 
of  the  Treasury,  who  shall,  if  in  his  judgment  business  conditions 
in  the  locality  demand  additional  circulation,  approve  the  same, 
and  shall  determine  the  time  of  issue  and  fix  the  amount,  within 
the  limitations  herein  imposed,  of  the  additional  circulating  notes 
to  be  issued.  Whenever  after  receiving  notice  of  such  approval 
any  such  association  shall  deposit  with  the  Treasurer  or  any  assist- 
ant treasurer  of  the  United  States  such  of  the  bonds  described  in 
this  section  as  shall  be  approved  in  character  and  amount  by  the 


448  APPENDIX 

Treasurer  of  the  United  States  and  the  Secretary  of  the  Treasury, 
it  shall  be  entitled  to  receive,  upon  the  order  of  the  Comptroller 
of  the  Currency,  circulating  notes  in  blank,  registered  and  counter- 
signed as  provided  by  law,  not  exceeding  in  amount  ninety  per 
centum  of  the  market  value,  but  not  in  excess  of  the  par  value  of 
any  bonds  so  deposited,  such  market  value  to  be  ascertained  and 
determined  under  the  direction  of  the  Secretary  of  the  Treasury. 

The  Treasurer  of  the  United  States,  with  the  approval  of  the 
Secretary  of  the  Treasury,  shall  accept  as  security  for  the  addi- 
tional circulating  notes  provided  for  in  this  section,  bonds  or  other 
interest-bearing  obligations  of  any  State  of  the  United  States,  or 
any  legally  authorized  bonds  issued  by  any  city,  town,  county,  or 
other  legally  constituted  municipality  or  district  in  the  United 
States  which  has  been  in  existence  for  a  period  of  ten  years,  and 
which  for  a  period  of  ten  years  previous  to  such  deposit  has  not 
defaulted  in  the  payment  of  any  part  of  either  principal  or  inter- 
est of  any  funded  debt  authorized  to  be  contracted  by  it,  and 
whose  net  funded  indebtedness  does  not  exceed  ten  per  centum  of 
the  valuation  of  its  taxable  property,  to  be  ascertained  by  the  last 
preceding  valuation  of  property  for  the  assessment  of  taxes.  The 
Treasurer  of  the  United  States,  with  the  approval  of  the  Secre- 
tary of  the  Treasury,  shall  accept,  for  the  purposes  of  this  section, 
securities  herein  enumerated  in  such  proportions  as  he  may  from 
time  to  time  determine,  and  he  may  with  such  approval  at  any 
time  require  the  deposit  of  additional  securities,  or  require  any 
association  to  change  the  character  of  the  securities  already  on 
deposit. 

Sec.  4.  That  the  legal  title  of  all  bonds,  whether  coupon  or 
registered,  deposited  to  secure  circulating  notes  issued  in  accord- 
ance with  the  terms  of  section  three  of  this  Act  shall  be  trans- 
ferred to  the  Treasurer  of  the  United  States  in  trust  for  the 
association  depositing  them,  under  regulations  to  be  prescribed 
by  the  Secretary  of  the  Treasury.  A  receipt  shall  be  given  to 
the  association  by  the  Treasurer  or  any  assistant  treasurer  of  the 
United  States,  stating  that  such  bond  is  held  in  trust  for  the  asso- 
ciation on  whose  behalf  the  transfer  is  made,  and  as  security  for 
the  redemption  and  payment  of  any  circulating  notes  that  have 


THE  ALDRICH-VREELAND   BILL  449 

been  or  may  be  delivered  to  such  association.  No  assignment  or 
transfer  of  any  such  bond  by  the  Treasurer  shall  be  deemed  valid 
unless  countersigned  by  the  Comptroller  of  the  Currency.  The 
provisions  of  sections  fifty-one  hundred  and  sixty-three,  fifty-one 
hundred  and  sixty-four,  fifty-one  hundred  and  sixty-five,  fifty-one 
hundred  and  sixty-six,  and  fifty-one  hundred  and  sixty-seven  and 
sections  fifty-two  hundred  and  twenty-four  to  fifty-two  hundred 
and  thirty-four,  inclusive,  of  the  Revised  Statutes  respecting 
United  States  bonds  deposited  to  secure  circulating  notes  shall, 
except  as  herein  modified,  be  applicable  to  all  bonds  deposited 
under  the  terms  of  section  three  of  this  Act. 

Sec.  5.  That  the  additional  circulating  notes  issued  under 
this  Act  shall  be  used,  held,  and  treated  in  the  same  way  as 
circulating  notes  of  national  banking  associations  heretofore 
issued  and  secured  by  a  deposit  of  United  States  bonds,  and 
shall  be  subject  to  all  the  provisions  of  law  affecting  such  notes 
except  as  herein  expressly  modified :  Provided^  that  the  total 
amount  of  circulating  notes  outstanding  of  any  national  banking 
association,  including  notes  secured  by  United  States  bonds  as 
now  provided  by  law,  and  notes  secured  otherwise  than  by  deposit 
of  such  bonds,  shall  not  at  any  time  exceed  the  amount  of  its 
unimpaired  capital  and  surplus :  and  Provided^  further^  that  there 
shall  not  be  outstanding  at  any  time  circulating  notes  issued 
under  the  provisions  of  this  Act  to  an  amount  of  more  than  five 
hundred  millions  of  dollars. 

Sec.  6.  That  whenever  and  so  long  as  any  national  banking 
association  has  outstanding  any  of  the  additional  circulating  notes 
authorized  to  be  issued  by  the  provisions  of  this  Act  it  shall  keep 
on  deposit  in  the  Treasury  of  the  United  States,  in  addition  to 
the  redemption  fund  required  by  section  three  of  the  Act  of  June 
twentieth,  eighteen  hundred  and  seventy-four,  an  additional  sum 
equal  to  five  per  centum  of  such  additional  circulation  at  any 
time  outstanding,  such  additional  five  per  centum  to  be  treated, 
held,  and  used  in  all  respects  in  the  same  manner  as  the  original 
redemption  fund  provided  for  by  said  section  three  of  the  Act  of 
June  twentieth,  eighteen  hundred  and  seventy- four. 


450  APPENDIX 

Sec.  7.  In  order  that  the  distribution  of  notes  to  be  issued 
under  the  provisions  of  this  Act  shall  be  made  as  equitable  as 
practicable  between  the  various  sections  of  the  country,  the  Secre- 
tary of  the  Treasury  shall  not  approve  applications  from  associa- 
tions in  any  State  in  excess  of  the  amount  to  which  such  State 
would  be  entitled  of  the  additional  notes  herein  authorized  on  the 
basis  of  the  proportion  which  the  unimpaired  capital  and  surplus 
of  the  national  banking  associations  in  such  State  bears  to  the 
total  amount  of  unimpaired  capital  and  surplus  of  the  national 
banking  associations  of  the  United  States  :  Provided^  however, 
that  in  case  the  applications  from  associations  in  any  State  shall 
not  be  equal  to  the  amount  which  the  associations  of  such  State 
would  be  entitled  to  under  this  method  of  distribution,  the  Sec- 
retary of  the  Treasury  may,  in  his  discretion,  to  meet  an  emer- 
gency, assign  the  amount  not  thus  applied  for  to  any  applying 
association  or  associations  in  States  in  the  same  section  of  the 
country. 

Sec.  8.  That  it  shall  be  the  duty  of  the  Secretary  of  the 
Treasury  to  obtain  information  with  reference  to  the  value  and 
character  of  the  securities  authorized  to  be  accepted  under  the 
provisions  of  this  Act,  and  he  shall  from  time  to  time  furnish 
information  to  national  banking  associations  as  to  such  securities 
as  would  be  acceptable  under  the  provisions  of  this  Act. 

Sec.  9.  That  section  fifty-two  hundred  and  fourteen  of  the 
Revised  Statutes,  as  amended,  be  further  amended  to  read  as 
follows : 

"Sec.  5214.  National  banking  associations  having  on  deposit 
bonds  of  the  United  States,  bearing  interest  at  the  rate  of  two 
per  centum  per  annum,  including  the  bonds  issued  for  the  con- 
struction of  the  Panama  Canal,  under  the  provisions  of  section 
eight  of  'An  Act  to  provide  for  the  construction  of  a  canal  con- 
necting the  waters  of  the  Atlantic  and  Pacific  oceans,'  approved 
June  twenty-eight,  nineteen  hundred  and  two,  to  secure  its  circu- 
lating notes,  shall  pay  to  the  Treasurer  of  the  United  States,  in 
the  months  of  January  and  July,  a  tax  of  one-fourth  of  one  per 
centum  each  half  year  upon  the  average  amount  of  such  of  its 
notes  in  circulation  as  are  based  upon  the  deposit  of  such  bonds  j 


THE  ALDRICH-VREELAND  BILL  45  I 

and  such  associations  having  on  deposit  bonds  of  the  United 
States  bearing  interest  at  a  rate  higher  than  two  per  centum  per 
annum  shall  pay  a  tax  of  one-half  of  one  per  centum,  each  half 
year  upon  the  average  amount  of  such  of  its  notes  in  circulation 
as  are  based  upon  the  deposit  of  such  bonds.  National  banking 
associations  having  circulating  notes  secured  otherwise  than  by 
bonds  of  the  United  States  shall  pay  for  the  first  month  a  tax  at 
the  rate  of  five  per  centum  per  annum  upon  the  average  amount 
of  such  of  their  notes  in  circulation  as  are  based  upon  the  deposit 
of  such  securities,  and  afterwards  an  additional  tax  of  one  per 
centum  per  annum  for  each  month  until  a  tax  of  ten  per  centum 
per  annum  is  reached,  and  thereafter  such  tax  of  ten  per  centum 
per  annum,  upon  the  average  amount  of  such  notes.  Every 
national  banking  association  having  outstanding  circulating  notes 
secured  by  a  deposit  of  other  securities  than  United  States  bonds 
shall  make  monthly  returns,  under  oath  of  its  president  or  cashier, 
to  the  Treasurer  of  the  United  States,  in  such  form  as  the 
Treasurer  may  prescribe,  of  the  average  monthly  amount  of  its 
notes  so  secured  in  circulation ;  and  it  shall  be  the  duty  of  the 
Comptroller  of  the  Currency  to  cause  such  reports  of  notes  in 
circulation  to  be  verified  by  examination  of  the  banks'  records. 
The  taxes  received  on  circulating  notes  secured  otherwise  than  by 
bonds  of  the  United  States  shall  be  paid  into  the  Division  of  Re- 
demption of  the  Treasury  and  credited  and  added  to  the  reserve 
fund  held  for  the  redemption  of  United  States  and  other  notes." 

Sec.  10.  That  section  nine  of  the  Act  approved  July  twelfth, 
eighteen  hundred  and  eighty-two,  as  amended  by  the  Act  approved 
March  fourth,  nineteen  hundred  and  seven,  be  further  amended 
to  read  as  follows : 

"  Sec.  9.  That  any  national  banking  association  desiring  to 
withdraw  its  circulating  notes,  secured  by  deposit  of  United 
States  bonds  in  the  manner  provided  in  section  four  of  the  Act 
approved  June  twentieth,  eighteen  hundred  and  seventy-four,  is 
hereby  authorized  for  that  purpose  to  deposit  lawful  money  with 
the  Treasurer  of  the  United  States  and,  with  the  consent  of  the 
Comptroller  of  the  Currency  and  the  approval  of  the  Secretary  of 
the  Treasury,  to  withdraw  a  proportionate  amount  of  bonds  held 


452  APPENDIX 

as  security  for  its  circulating  notes  in  the  order  of  such  deposits: 
Provided^  that  not  more  than  nine  millions  of  dollars  of  lawful 
money  shall  be  so  deposited  during  any  calendar  month  for  this 
purpose. 

"Any  national  banking  association  desiring  to  withdraw  any 
of  its  circulating  notes,  secured  by  the  deposit  of  securities  other 
than  bonds  of  the  United  States,  may  make  such  withdrawal  at 
any  time  in  like  manner  and  effect  by  the  deposit  of  lawful  money 
or  national  bank  notes  with  the  Treasurer  of  the  United  States, 
and  upon  such  deposit  a  proportionate  share  of  the  securities  so 
deposited  may  be  withdrawn:  Provided^  that  the  deposits  under 
this  section  to  retire  notes  secured  by  the  deposit  of  securities 
other  than  bonds  of  the  United  States  shall  not  be  covered  into 
the  Treasury,  as  required  by  section  six  of  an  Act  entitled  '  An 
Act  directing  the  purchase  of  silver  bullion  and  the  issue  of 
Treasury  notes  thereon,  and  for  other  purposes,'  approved  July 
fourteen,  eighteen  hundred  and  ninety,  but  shall  be  retained  in 
the  Treasury  for  the  purpose  of  redeeming  the  notes  of  the  bank 
making  such  deposit." 

Sec.  1 1.  That  section  fifty-one  hundred  and  seventy-two  of  the 
Revised  Statutes  be,  and  the  same  is  hereby,  amended  to  read  as 
follows : 

"  Sec.  5172.  In  order  to  furnish  suitable  notes  for  circulation, 
the  Comptroller  of  the  Currency  shall,  under  the  direction  of  the 
Secretary  of  the  Treasury,  cause  plates  and  dies  to  be  engraved, 
in  the  best  manner  to  guard  against  counterfeiting  and  fraudulent 
alterations,  and  shall  have  printed  therefrom,  and  numbered,  such 
quantity  of  circulating  notes,  in  blank,  of  the  denominations  of 
five  dollars,  ten  dollars,  twenty  dollars,  fifty  dollars,  one  hundred 
dollars,  five  hundred  dollars,  one  thousand  dollars,  and  ten  thou- 
sand dollars,  as  may  be  required  to  supply  the  associations  entitled 
to  receive  the  same.  Such  notes  shall  state  upon  their  face  that 
they  are  secured  by  United  States  bonds  or  other  securities,  certi- 
fied by  the  written  or  engraved  signatures  of  the  Treasurer  and 
Register  and  by  the  imprint  of  the  seal  of  the  Treasury.  They 
shall  also  express  upon  their  face  the  promise  of  the  association 
receiving  the  same  to  pay  on  demand,  attested  by  the  signature  of 


THE  ALDRICH-VREELAND   BILL  453 

the  president  or  vice-president  and  cashier.  The  Comptroller  of 
the  Currency,  acting  under  the  direction  of  the  Secretary  of  the 
Treasury,  shall  as  soon  as  practicable  cause  to  be  prepared  circu- 
lating notes  in  blank,  registered  and  countersigned,  as  provided 
by  law,  to  an  amount  equal  to  fifty  per  centum  of  the  capital  stock 
of  each  national  banking  association  ;  such  notes  to  be  deposited 
in  the  Treasury  or  in  the  sub-treasury  of  the  United  States  nearest 
the  place  of  business  of  each  association,  and  to  be  held  for  such 
association,  subject  to  the  order  of  the  Comptroller  of  the  Cur- 
rency, for  their  delivery  as  provided  by  law :  Provided,  that  the 
Comptroller  of  the  Currency  may  issue  national  bank  notes  of  the 
present  form  until  plates  can  be  prepared  and  circulating  notes 
issued  as  above  provided :  Provided,  however,  that  in  no  event 
shall  bank  notes  of  the  present  form  be  issued  to  any  bank  as 
additional  circulation  provided  for  by  this  Act." 

Sec.  12.  That  circulating  notes  of  national  banking  associa- 
tions, when  presented  to  the  Treasury  for  redemption,  as  provided 
in  section  three  of  the  Act  approved  June  twentieth,  eighteen 
hundred  and  seventy- four,  shall  be  redeemed  in  lawful  money  of 
the  United  States. 

Sec.  13.  That  all  acts  and  orders  of  the  Comptroller  of  the 
Currency  and  the  Treasurer  of  the  United  States  authorized  by 
this  Act  shall  have  the  approval  of  the  Secretary  of  the  Treasury 
who  shall  have  power,  also,  to  make  any  such  rules  and  regula- 
tions and  exercise  such  control  over  the  organization  and  manage- 
ment of  national  currency  associations  as  may  be  necessary  to 
carry  out  the  purposes  of  this  Act. 

Sec.  14.  That  the  provisions  of  section  fifty-one  hundred  and 
ninety-one  of  the  Revised  Statutes,  with  reference  to  the  reserves 
of  national  banking  associations,  shall  not  apply  to  deposits  of 
public  moneys  by  the  United  States  in  designated  depositaries. 

Sec.  15.  That  all  national  banking  associations  designated  as 
regular  depositaries  of  public  money  shall  pay  upon  all  special 
and  additional  deposits  made  by  the  Secretary  of  the  Treasury  in 
such  depositaries,  and  all  such  associations  designated  as  tempo- 
rary depositaries  of  public  money  shall  pay  upon  all  sums  of  pubhc 
money  deposited  in  such  associations  interest  at  such  rate  as  the 


454  APPENDIX 

Secretary  of  the  Treasury  may  prescribe,  not  less,  however,  than 
one  per  centum  per  annum  upon  the  average  monthly  amount  of 
such  deposits :  Provided^  however,  that  nothing  contained  in  this 
Act  shall  be  construed  to  change  or  modify  the  obligation  of  any 
association  or  any  of  its  officers  for  the  safe-keeping  of  public 
money :  Provided,  further,  that  the  rate  of  interest  charged  upon 
such  deposits  shall  be  equal  and  uniform  throughout  the  United 
States. 

Sec.  i6.  That  a  sum  sufficient  to  carry  out  the  purposes  of  the 
preceding  sections  of  this  Act  is  hereby  appropriated  out  of  any 
money  in  the  Treasury  not  otherwise  appropriated. 

Sec.  17.  That  a  Commission  is  hereby  created,  to  be  called 
the  *'  National  Monetary  Commission,"  to  be  composed  of  nine 
members  of  the  Senate,  to  be  appointed  by  the  Presiding  Officer 
thereof,  and  nine  members  of  the  House  of  Representatives,  to 
be  appointed  by  the  Speaker  thereof ;  and  any  vacancy  on  the 
Commission  shall  be  filled  in  the  same  manner  as  the  original 
appointment. 

Sec.  18.  That  it  shall  be  the  duty  of  this  Commission  to 
inquire  into  and  report  to  Congress  at  the  earliest  date  practi- 
cable, what  changes  are  necessary  or  desirable  in  the  monetary 
system  of  the  United  States  or  in  the  laws  relating  to  banking 
and  currency,  and  for  this  purpose  they  are  authorized  to  sit 
during  the  sessions  or  recess  of  Congress,  at  such  times  and 
places  as  they  may  deem  desirable,  to  send  for  persons  and  papers, 
to  administer  oaths,  to  summons  and  compel  the  attendance  of 
witnesses,  and  to  employ  a  disbursing  officer  and  such  secretaries, 
experts,  stenographers,  messengers,  and  other  assistan^ts  as  shall 
be  necessary  to  carry  out  the  purposes  for  which  said  Commission 
was  created.  The  Commission  shall  have  the  power,  through 
subcommittee  or  otherwise,  to  examine  witnesses  and  to  make  such 
investigations  and  examinations,  in  this  or  other  countries,  of  the 
subjects  committed  to  their  charge  as  they  shall  deem  necessary. 

Sec.  19.  That  a  sum  sufficient  to  carry  out  the  purposes  of 
sections  seventeen  and  eighteen  of  this  Act,  and  to  pay  the  neces- 
sary expenses  of  the  Commission  and  its  members,  is  hereby 
appropriated,  out  of  any  money  in  the  Treasury  not  otherwise 


THE  ALDRICH-VREELAND  BILL  455 

appropriated.  Said  appropriation  shall  be  immediately  available 
and  shall  be  paid  out  on  the  audit  and  order  of  the  chairman  or 
acting  chairman  of  said  Commission,  which  audit  and  order  shall 
be  conclusive  and  binding  upon  all  Departments  as  to  the  correct- 
ness of  the  accounts  of  such  Commission. 

Sec.  20.  That  this  Act  shall  expire  by  limitation  on  the  thir- 
tieth day  of  June,  nineteen  hundred  and  fourteen. 

Approved  May  30,  1908. 

The  Commission  appointed  in  pursuance  of  the  foregoing 
act  consists  of : 

Senators  Representatives 

Nelson  W.  Aldrich,  R.I.  E.  B.  Vreeland,  N.Y. 

Eugene  Hale,  Maine  J.  W.  Weeks,  Mass. 

P.  C.  Knox,  Pa.  Theo.  E.  Burton,  Ohio 

J.  C.  Burrows,  Mich.  G.  F.  Burgess,  Tex. 

J.  W.  Bailey,  Tex.  A.  P.  Pujo,  La. 

H.  D.  Money,  Miss.  L.  P.  Padgett,  Tenn. 

H.  M.  Teller,  Colo.  R.  W.  Bonynge,  Colo. 

F.  P.  Flint,  Cal.  J.  McLachlan,  Cal. 

J.  P.  Taliaferro,  Fla.  Geo.  W.  Prince,  111. 

Thus  the  act  of  May  30,  1908,  authorizes,  in  two  different 
ways,  the  issue  of  national  bank  notes  additional  to  those 
heretofore  existing,  namely: 

I.  By  the  pledging  of  any  securities  including  commercial 
paper,  representing  actual  commercial  transactions  and  bear- 
ing two  or  more  responsible  signatures,  and  running  not 
more  than  four  months.  Such  securities  and  paper  shall 
remain  in  the  custody  of  the  national  currency  association 
to  which  the  bank  applying  for  the  circulating  notes  belongs. 
The  amount  of  notes  issuable  thereon  shall  not  exceed  75 
per  cent  of  the  cash  value  thereof.  All  the  banks  in  the 
currency  association  are  jointly  and  severally  liable  for  all 
the  circulating  notes  so  issued. 


45^  APPENDIX 

2.  By  the  transfer  to  the  custody  of  the  Treasurer  of 
the  United  States  of  any  bonds,  or  other  interest  bearing 
obligations,  of  any  state  of  the  United  States,  or  of  any  legally 
authorized  bonds  of  any  city,  town,  county,  municipaUty,  or 
district  in  the  United  States.  Against  such  securities  circu- 
lating notes  may  be  issued  not  exceeding  90  per  cent  of  their 
market  value. 

All  of  the  securities  in  both  categories  are  subject  to  the 
approval  of  the  Secretary  of  the  Treasury,  who  may  require 
additional  securities,  or  a  substitution  of  other  securities,  in 
any  case  where  he  deems  the  existing  ones  insufficient.  The 
national  currency  associations  may  exercise  the  same  powers 
and  make  the  same  requirement  in  respect  of  the  securities 
deposited  with  them  by  any  bank  in  their  respective  associ- 
ations. 

Bank  notes  in  either  of  these  categories  shall  be  subject 
to  a  tax  of  5  per  cent  per  annum  for  the  first  month  and 
afterwards  to  an  additional  tax  of  i  per  cent  for  each  month 
until  a  tax  of  10  per  cent  per  annum  is  reached,  which  rate 
shall  continue  as  long  as  they  remain  outstanding.  For  all 
such  notes  the  issuing  bank  must  keep  a  redemption  fund 
in  the  Treasury  of  the  United  States  of  10  per  cent,  i.e.^  5 
per  cent  more  than  the  amount  required  for  the  redemption 
of  notes  issued  against  government  bonds.  The  Treasury 
assumes  the  responsibility  of  redeeming  the  notes  of  all 
failed  banks.     No  notes  have  been  issued  under  this  act. 


APPENDIX  B 

THE  ALDRICH  PLAN  FOR  THE  RESERVE  ASSOCIATION  OF 
AMERICA 

Charter  and  Location 

It  is  proposed  to  charter  the  Reserve  Association  of  America, 
which  will  be  the  principal  fiscal  agent  of  the  government  of 
the  United  States.  The  authorized  capital  of  the  Reserve  Asso- 
ciation shall  be  approximately  $300,000,000.  The  length  of  its 
charter  shall  be  fifty  years.  The  head  office  of  the  association 
shall  be  in- Washington,  D.C. 

The  country  shall  be  divided  into  fifteen  districts,  and  a  branch 
of  the  Reserve  Association  shall  be  located  in  each  district. 

The  Reserve  Association  and  its  branches  shall  be  exempt 
from  state  and  local  taxation,  except  in  respect  to  taxes  upon 
real  estate  owned  by  it. 

Capital 

Only  national  banks  of  the  classes  hereinafter  provided  for 
may  subscribe  to  the  capital  stock  of  the  Reserve  Association. 
A  national  bank  having  a  minimum  capital  of  at  least  $25,000 
may  subscribe  to  an  amount  of  capital  stock  of  the  Reserve 
Association  equal  to  20  per  cent  of  the  stock  of  the  subscribing 
national  bank,  and  not  less,  and  each  of  such  subscribing  banks 
shall  become  a  member  of  a  local  association  as  hereinafter  pro- 
vided for.  Fifty  per  cent  of  the  subscriptions  to  the  capital  stock 
of  the  Reserve  Association  shall  be  called  in  cash ;  the  balance 
of  the  subscriptions  will  remain  a  liability  of  the  stockholders, 
subject  to  call. 

457 


458  APPENDIX 

Shares  of  the  capital  stock  of  the  Reserve  Association  will 
not  be  transferable,  and  under  no  circumstances  may  they  be 
owned  by  any  corporation  other  than  the  subscribing  nationai 
bank,  nor  by  any  individual,  nor  may  they  be  owned  by  any 
national  bank  in  any  other  amount  than  in  the  proportion  here 
provided.  In  the  case  of  a  national  bank  increasing  its  capital 
after  it  once  becomes  a  subscriber  to  the  stock  of  the  Reserve 
Association,  the  national  bank  shall  thereupon  subscribe  for  an 
additional  amount  of  the  capital  stock  of  the  Reserve  Associa- 
tion equal  to  20  per  cent  of  the  national  bank's  increase  of  cap- 
ital, paying  therefor  its  then  book  value,  but  only  one-half  of 
this  additional  subscription  will  be  called  in  cash,  as  hereinbe- 
fore provided.  In  the  event  of  a  national  bank  which  is  a 
holder  of  the  capital  stock  of  the  Reserve  Association  decreas- 
ing its  capital,  it  shall  surrender  a  proportionate  amount  of  its 
holdings  of  the  capital  stock  of  the  Reserve  Association ;  or  if 
a  national  bank  goes  into  liquidation,  it  shall  surrender  all  of  its 
holdings  of  the  capital  stock  of  the  Reserve  Association.  The 
capital  of  the  Reserve  Association  so  surrendered  shall  be  can- 
celed, and  the  national  bank  thus  surrendering  stock  in  the  Re- 
serve Association  shall  receive  in  pa)rment  therefor  a  sum  equal 
to  the  then  book  value,  as  shown  on  the  balance  sheet  of  the 
Reserve  Association,  of  the  stock  so  surrendered. 

Earnings  and  Dividends 

The  earnings  of  the  Reserve  Association  shall  be  distributed 
in  the  following  manner : 

After  the  payment  of  all  expenses  and  taxes  the  stockholders 
shall  receive  4  per  cent.  Further  earnings  shall  be  divided,  one- 
half  to  go  to  the  surplus  of  the  Reserve  Association  until  that 
surplus  shall  amount  to  20  per  cent  of  the  paid-in  capital ;  one- 
fourth  to  go  to  the  government  of  the  United  States,  and  one- 
fourth  to  the  stockholders ;  but  when  the  stockholders'  divi- 
dends shall  reach  5  per  cent,  they  shall  receive  no  additional 


THE  ALDRICH   PLAN  459 

distribution.  After  the  stockholders  receive  5  per  cent  the 
earnings  shall  be  divided,  one-half  to  be  added  to  the  surplus 
of  the  Reserve  Association  and  one-half  to  go  to  the  govern- 
ment. After  the  stockholders  receive  5  per  cent  per  annum  and 
the  surplus  of  the  Reserve  Association  amounts  to  20  per  cent 
of  the  paid-in  capital,  all  excess  earnings  shall  go  to  the  gov- 
ernment. The  minimum  dividends  to  the  stockholders  shall  be 
cumulative. 

Local  Associations  of  National  Banks 

All  subscribing  banks  shall  be  formed  into  associations  of 
national  banks,  to  be  designated  as  local  associations.  Every 
local  association  shall  be  composed  of  not  less  than  ten  banks, 
and  the  combined  capital  and  surplus  of  the  members  of  each 
local  association  shall  aggregate  not  less  than  $5,000,000. 

All  the  local  associations  shall  be  grouped  into  fifteen  divi- 
sions, to  be  called  districts.  The  territory  included  in  the  local 
associations  shall  be  so  apportioned  that  every  national  bank 
will  be  located  within  the  boundaries  of  some  local  association. 
Every  subscribing  national  bank  shall  become  a  member  of  the 
local  association  of  the  territory  in  which  it  is  situated. 

Directors  of  Local  Associations 

Each  local  association  shall  elect  annually  a  board  of  directors 
in  the  following  manner : 

The  number  of  the  directors  may  be  determined  by  the  by- 
laws of  the  local  associations.  Three-fifths  of  that  number  shall 
be  elected  by  ballot  cast  by  the  representatives  of  the  banks 
that  are  members  of  the  local  association,  each  bank  having 
one  representative,  and  each  representative  one  vote,  without 
reference  to  the  size  of  the  bank.  Two-fifths  of  the  whole 
number  of  directors  of  the  local  association  shall  be  elected  by 
these  same  representatives  of  the  several  banks  that  are  mem- 
bers of  the  association ;  but  in  voting  for  these  additional  directors 


46o  APPENDIX 

each  representative  shall  be  entitled  to  as  many  votes  as  the 
bank  which  he  represents  holds  shares  in  the  Reserve  Asso- 
ciation. At  such  elections  there  shall  be  no  proxies.  The  au- 
thorized representatives  of  a  bank,  as  herein  provided,  must  be 
either  the  president,  vice  president,  or  cashier  of  the  bank  he 
represents. 

Directors  of  Branches 

As  heretofore  provided,  all  the  local  associations  shall  be 
grouped  into  fifteen  divisions,  and  each  of  these  divisions  shall 
be  designated  a  district.  There  shall  be  located  in  each  district 
a  branch  of  the  Reserve  Association.  Each  of  the  fifteen 
branches  of  the  Reserve  Association  shall  have  a  board  of  direc- 
tors, and  those  directors  shall  be  elected  in  the  following  manner : 

The  board  of  directors  of  each  local  association  shall  elect  by 
ballot  one  member  of  the  board  of  directors  of  the  branch  of 
the  Reserve  Association.  In  this  manner  there  will  thus  be 
elected  as  many  directors  of  the  branch  of  the  Reserve  Associ- 
ation as  there  may  be  local  associations  in  the  district  in  which 
that  branch  of  the  Reserve  Association  is  located.  In  addition 
to  that  number  there  shall  be  elected  a  number  of  the  directors 
equal  to  two-thirds  of  the  number  of  local  associations  in  the 
district  where  the  branch  is  located.  Such  additional  directors 
shall  be  elected  in  the  following  manner : 

There  shall  be  chosen  by  the  banks  composing  each  local 
association  a  voting  representative  or  proxy  holder.  In  choos- 
ing such  voting  representative  each  bank  shall  be  entitled  to  as 
many  votes  as  it  holds  shares  in  the  Reserve  Association.  The 
voting  representatives  of  the  several  local  associations  which 
form  a  district  shall  then  meet  at  the  office  of  the  branch  and 
elect  an  additional  number  of  directors  of  the  branch  equal  to 
two-thirds  of  the  number  elected  directly  by  the  local  associa- 
tions ;  that  is,  equal  to  two-thirds  of  the  number  of  local  asso- 
ciations composing  the  district.    Each  voting  representative  at 


THE  ALDRICH   PLAN  461 

such  election  shall  have  a  number  of  votes  equal  to  the  number 
of  shares  in  the  Reserve  Association  held  by  all  the  banks  com- 
posing the  local  association  which  he  represents. 

The  first  business  of  the  board  of  the  branch  as  thus  con- 
stituted shall  be  to  add  to  its  numbers  by  the  election  of  an 
additional  number  of  directors  equal  to  one-third  the  number  of 
local  associations  situated  in  the  district.  Such  additional  direc- 
tors shall  fairly  represent  the  industrial,  commercial,  agricultural, 
and  other  interests  of  the  district  and  shall  not  be  officers  of 
banks.    Directors  of  banks  shall  not  be  considered  as  officers. 

The  manager  of  the  branch  shall  be  ex  officio  a  member  of 
the  board  of  directors  of  the  branch  and  shall  be  chairman  of 
the  board. 

The  board  of  directors  of  a  branch  of  the  Reserve  Associa- 
tion will  thus  be  composed  of : 

First.  A  group  of  directors  equal  in  number  to  the  number 
of  local  associations  composing  the  district,  and  this  group  shall 
be  elected  by  the  dire<jtors  of  the  local  association,  each  director 
having  one  vote. 

Second.  A  group  of  directors  equal  to  two-thirds  of  the  fore- 
going group  and  elected  by  stock  representation. 

Third.  A  group  of  directors  equal  in  number  to  one-third  of 
the  first  group,  representing  the  industrial,  commercial,  agricul- 
tural, and  other  interests  of  the  district,  and  elected  by  the  votes 
of  the  first  two  groups,  each  director  thus  voting  having  one  vote. 

Fourth.  The  manager  of  the  branch  shall  be  ex  officio  a 
member  of  the  board  of  directors  of  the  branch  and  shall  be 
chairman  of  the  board. 

All  the  members  of  the  board  of  directors  of  the  branch, 
except  the  ex  officio  member,  shall,  at  the  first  meeting  of  the 
board,  be  classified  into  three  classes,  and  the  terms  of  office  of 
these  three  classes  shall  be  respectively  one,  two,  and  three 
years.  Thereafter  members  of  the  board  shall  be  elected  for 
a  term  of  three  years. 


462  APPENDIX 

Directors  of  the  Reserve  Association 

The  board  of  the  Reserve  Association  shall  consist  of  forty- 
five  directors,  and  it  shall  be  composed  in  the  following 
manner : 

First.  Six  ex  officio  members,  namely,  the  governor  of  the 
Reserve  Association  (who  shall  be  chairman  of  the  board),  two 
deputy  governors  of  the  Reserve  Association,  the  Secretary  of 
the  Treasury,  the  Secretary  of  Commerce  and  Labor,  and  the 
Comptroller  of  the  Currency. 

Second.  Fifteen  directors  to  be  elected,  one  by  the  board  of 
directors  of  each  branch  of  the  Reserve  Association.  They 
shall  be  elected  by  ballot,  each  member  of  the  branch  board 
having  one  vote. 

Third.  Twelve  directors,  who  shall  be  elected  by  voting  rep- 
resentatives, one  representing  the  banks  embraced  in  each 
district.  Each  voting  representative  shall  cast  a  number  of  votes 
equal  to  the  number  of  shares  in  the  Reserve  Association  held 
by  all  the  banks  in  the  district  which  he  represents. 

Fourth.  The  board  as  thus  constituted  shall  select  twelve 
additional  members,  who  shall  fairly  represent  the  industrial, 
commercial,  agricultural,  and  other  interests  of  the  country,  and 
who  shall  not  be  officers  of  banks.  Directors  of  banks  shall  not 
be  considered  as  officers. 

At  the  first  meeting  of  the  board  all  the  members  of  the 
board,  except  the  ex  officio  members,  shall  be  classified  into  three 
classes,  and  the  terms  of  office  of  these  three  classes  shall  be  re- 
spectively one,  two,  and  three  years.  Thereafter  members  of 
the  board  shall  be  elected  for  a  term  of  three  years. 

No  member  of  any  national  or  state  legislative  body  shall 
be  a  director  of  the  Reserve  Association,  nor  of  any  of  the 
branches,  nor  of  any  local  association. 

The  directors  of  the  Reserve  Association  shall  annually  elect 
an  executive  committee   and   such  other  committees  as  the 


THE  ALDRICH   PLAN  463 

by-laws  of  the  Reserve  Association  may  provide.  The  executive 
committee  shall  consist  of  nine  members,  of  which  the  governor 
of  the  Reserve  Association  shall  be  ex  officio  chairman,  and  the 
two  deputies  and  the  Comptroller  of  the  Currency  ex  officio 
members. 

The  executive  committee  shall  have  all  the  authority  which 
is  vested  in  the  board  of  directors,  except  such  as  may  be 
specifically  delegated  by  the  board  to  other  committees  or  to 
the  executive  officers. 

There  shall  be  a  board  of  supervision  elected  by  the  board  of 
directors  from  among  its  number,  of  which  the  Secretary  of  the 
Treasury  shall  be  ex  officio  chairman. 

Executive  Officers  of  the  Reserve  Association 

The  executive  officers  of  the  Reserve  Association  shall  con- 
sist of  a  governor,  two  deputy  governors,  a  secretary,  and  such 
subordinate  officers  as  may  be  provided  by  the  by-laws.  The 
governor  and  deputy  governors  shall  be  selected  by  the  Presi- 
dent of  the  United  State?  from  a  list  submitted  by  the  board  of 
directors.  The  governor  shall  be  subject  to  removal  by  the 
President  of  the  United  States  for  cause.  The  term  of  office 
of  the  deputies  shall  be  seven  years,  but  the  two  deputies  first 
appointed  shall  be  for  terms  of  four  years  and  seven  years 
respectively. 

In  the  absence  of  the  governor  or  his  inability  to  act,  the 
deputy  who  is  senior  in  point  of  service  shall  act  as  governor. 

Executive  Officers  of  Branches 

Each  branch  shall  have  a  manager  and  a  deputy  manager. 
They  shall  be  appointed  by  the  governor  of  the  Reserve  Asso- 
ciation, with  the  approval  of  the  executive  committee. 

The  powers  and  duties  of  the  manager  and  deputy  manager 
and  of  the  various  committees  of  the  branches  shall  be  pre- 
scribed by  the  by-laws  of  the  Reserve  Association. 


464  APPENDIX 

Functions  of  the  Local  Associations 

Any  member  of  a  local  association  may  apply  to  that  local 
association  for  a  guaranty  of  the  commercial  paper  which  it 
desires  to  rediscount  at  the  branch  of  the  Reserve  Association 
in  its  district.  Any  such  bank  receiving  a  guaranty  from  a  local 
association  shall  pay  a  commission  to  the  local  association,  to  be 
fixed  from  time  to  time  by  the  board  of  directors  of  that  local 
association.  The  guaranty  of  the  members  of  the  local  asso- 
ciation, in  the  event  of  loss,  shall  be  met  by  the  members  of 
the  local  association  in  the  proportion  to  the  ratio  which  their 
capital  and  surplus  bears  to  the  aggregate  capital  and  surplus 
of  the  local  association ;  and  the  commission  received  for  such 
guaranty,  after  the  payment  of  losses  and  expenses,  shall  be 
distributed  among  the  several  banks  of  the  local  association  in 
the  same  proportion.  A  local  association  shall  have  authority  to 
require  additional  security  from  any  bank  offering  paper  for 
guaranty,  or  may  decline  to  grant  the  application. 

The  total  amount  of  guaranties  by  a  local  association  to  the 
Reserve  Association  shall  not  at  any  time  exceed  the  aggre- 
gate capital  and  surplus  of  the  banks  forming  the  guaranteeing 
association. 

Functions  of  the  Reserve  Association 

All  of  the  privileges  and  advantages  of  the  Reserve  Asso- 
ciation shall  be  equitably  extended  to  every  national  bank  of  any 
of  the  classes  herein  defined  who  shall  subscribe  to  its  propor- 
tion of  the  stock  of  the  Reserve  Association  and  shall  other- 
wise conform  to  the  requirements  of  this  act. 

The  government  of  the  United  States  and  those  national 
banks  owning  stock  in  the  Reserve  Association  shall  be  the 
sole  depositors  in  the  Reserve  Association.  All  domestic  trans- 
actions of  the  Reserve  Association  shall  be  confined  to  the 
government  and  the  subscribing  banks,  with  the  exception  of 


THE  ALDRICH   PLAN  465 

the  purchase  or  sale  of  government  or  state  securities,  or 
securities  of  foreign  governments,  or  of  gold  coin  or  bullion. 

The  government  of  the  United  States  shall  deposit  its 
cash  balance  with  the  Reserve  Association,  and  thereafter  all 
receipts  of  the  government  shall  be  deposited  with  the  Reserve 
Association  or  (when  necessary)  with  such  national  banks  as 
the  government  may  designate  for  that  purpose  in  cities  where 
there  is  no  branch  of  the  Reserve  Association.  All  disburse- 
ments by  the  government  shall  be  made  through  the  Reserve 
Association. 

The  Reserve  Association  shall  pay  no  interest  on  deposits. 

The  Reserve  Association  may  rediscount  notes  and  bills  of 
exchange  arising  out  of  commercial  transactions,  for  and  with 
the  indorsement  of  any  bank  having  a  deposit  with  it.  Such 
notes  and  bills  must  have  a  maturity  of  not  more  than  twenty- 
eight  days,  and  must  have  been  made  at  least  thirty  days  prior 
to  the  date  of  rediscount.  The  amount  so  rediscounted  shall  in 
no  case  exceed  the  capital  of  the  bank  applying  for  the  redis- 
count. The  aggregate  of  such  notes  and  bills  bearing  the 
signature  or  indorsement  of  any  one  person,  company,  corpora- 
tion, or  firm,  rediscounted  for  any  one  bank,  shall  at  no  time 
exceed  10  per  cent  of  the  capital  and  surplus  of  said  bank. 

The  Reserve  Association  may  also  rediscount  for  any  de- 
positing bank,  notes  and  bills  of  exchange  arising  out  of 
commercial  transactions,  having  more  than  twenty-eight  days 
but  not  exceeding  four  months  to  run,  but  in  such  cases  the 
paper  must  be  guaranteed  by  the  local  association  of  which  the 
bank  asking  for  the  rediscount  is  a  member. 

Whenever,  in  the  opinion  of  the  governor  of  the  Reserve 
Association,  the  public  interests  so  require,  such  opinion  to  be 
concurred  in  by  the  executive  committee  of  the  Reserve  Asso- 
ciation and  to  have  the  definite  approval  of  the  Secretary  of  the 
Treasury,  the  Reserve  Association  may  discount  the  direct 
obligation  of  a  depositing  bank,  indorsed  by  its  local  association, 


466  APPENDIX 

provided  that  the  indorsement  of  the  local  association  shall 
be  fully  secured  by  the  pledge  and  deposit  with  it  of  satis- 
factory securities,  which  shall  be  held  by  the  local  association 
for  account  of  the  Reserve  Association ;  but  in  no  such  case 
shall  the  amount  loaned  by  the  Reserve  Association  exceed  two- 
thirds  of  the  actual  value  of  the  securities  so  pledged. 

The  rate  of  discount  of  the  Reserve  Association,  which  shall 
be  uniform  throughout  the  United  States,  shall  be  fixed  from 
time  to  time  by  the  executive  committee  and  duly  published. 

The  Reserve  Association  may,  whenever  its  own  condition 
and  the  general  financial  conditions  warrant  such  investment, 
purchase  to  a  limited  amount  from  a  depositing  bank  acceptances 
of  banks  or  houses  of  unquestioned  financial  responsibility. 
Such  acceptances  must  arise  from  commercial  transactions 
and  have  a  maturity  not  exceeding  ninety  days,  and  must  be 
of  a  character  generally  known  in  the  market  as  prime  bills. 
Such  acceptances  shall  also  bear  the  indorsement  of  the  de- 
positing bank  selling  the  same,  which  indorsement  must  be 
other  than  that  of  the  acceptor. 

The  Reserve  Association  may  invest  in  United  States  bonds 
and  in  short-term  obligations  —  that  is,  obligations  having  not 
more  than  one  year  to  run  —  of  the  United  States,  or  of  any 
state,  or  of  certain  foreign  governments  to  be  named  in  the  act. 

The  Reserve  Association  shall  have  power  at  home  and 
abroad  to  deal  in  gold  coin  or  bullion,  to  grant  loans  thereon, 
and  to  contract  for  loans  of  gold  coin  or  bullion,  giving,  when 
necessary,  acceptable  security  for  their  repayment. 

The  Reserve  Association  shall  have  power  to  purchase  from 
its  depositors  and  to  sell,  with  or  without  its  indorsement,  checks 
or  bills  of  exchange  payable  in  England,  France,  or  Germany, 
and  in  such  other  foreign  countries  as  the  board  of  the  Reserve 
Association  may  decide.  These  bills  of  exchange  must  arise 
from  commercial  transactions  and  be  of  a  maturity  not  exceed- 
ing ninety  days,  and  shall  bear  the  signatures  of  at  least  three 


THE  ALDRICH   PLAN  467 

responsible  parties,  of  which  the  last  one  shall  be  that  of  a 
depositing  bank. 

The  Reserve  Association  shall  have  power  to  open  and  main- 
tain banking  accounts  in  foreign  countries  and  to  establish 
agencies  in  foreign  countries,  for  the  purpose  of  purchasing,  sell- 
ing, and  collecting  foreign  bills  of  exchange ;  and  it  shall  have 
authority  to  buy  and  sell,  through  such  agencies,  prime  foreign 
bills  of  exchange  arising  from  commercial  transactions,  running 
for  a  period  not  exceeding  ninety  days,  and  bearing  the  signa- 
tures of  two  or  more  responsible  parties. 

Domestic  Exchanges 

It  shall  be  the  duty  of  the  Reserve  Association  or  any  of  its 
branches,  upon  request,  to  transfer  any  part  of  the  deposit 
balance  of  any  national  bank  having  an  account  with  it,  to  the 
credit  of  any  other  bank  having  an  account  with  the  Reserve 
Association.  If  a  deposit  balance  is  transferred  from  the  books 
of  one  branch  of  the  Reserve  Association  to  the  books  of  another 
branch,  it  may  be  done  by  mail  or  telegraph  upon  terms  to  be 
fixed  from  time  to  time  by  the  executive  committee. 

Functions  of  National  Banks 

In  addition  to  the  rights  now  conferred  by  law,  national  banks 
shall  be  authorized  to  accept  commercial  paper  drawn  upon 
them,  having  not  more  than  ninety  days  to  run,  properly  secured 
and  arising  out  of  commercial  transactions.  The  amount  of 
such  acceptances  shall  not  exceed  one-half  the  capital  and 
surplus  of  the  accepting  bank. 

National  banks  shall  not  have  authority  to  establish  branches 
except  in  the  city  or  town  in  which  they  are  located. 

The  organization  of  banks  to  conduct  business  in  foreign 
countries  shall  be  authorized.  The  stock  of  such  banks  may  be 
held  by  national  banks.  The  bank  so  organized  may  have  an 
office  in  the  United  States,  but  shall  not  compete  with  national 


468  APPENDIX 

banks  for  domestic  business  not  necessarily  related  to  the 
business  being  done  in  foreign   countries. 

There  shall  be  established  a  new  class  of  national  banks,  to 
be  known  by  a  specifically  designated  name.  Such  banks  may 
have  savings  departments  and  may  make  properly  secured  loans 
on  real  estate,  such  loans  to  be  restricted  to  a  certain  proportion 
of  the  aggregate  time  and  savings  deposits  in  the  bank.  The 
reserve  requirement  in  such  banks  will  be  less  against  savings 
and  time  deposits  than  against  demand  deposits. 

Another  class  of  national  banks  shall  be  authorized,  which 
shall  be  in  effect  national  trust  companies,  to  be  designated  by 
some  appropriate  name  and  to  exercise  all  the  functions  and 
have  all  the  privileges,  including  length  of  charter,  which  are 
given  to  trust  companies  by  the  laws  of  the  various  states.  These 
national  institutions  shall  be  subject,  like  other  national  banks, 
to  inspection  and  examination  by  the  national  government. 

There  shall  be  no  change  in  the  percentage  of  reserve  required 
by  law  to  be  held  against  demand  deposits  by  national  banks, 
except  as  otherwise  provided  herein,  but  the  deposit  balance  of 
any  national  bank  in  the  Reserve  Association  shall  be  counted 
as  a  part,  of  its  legal  reserve. 

Reports  to  the  Comptroller 

The  Reserve  Association  shall  make  a  report,  showing  the 
principal  items  of  its  balance  sheet,  to  the  Comptroller  of  the 
Currency  once  a  week.  These  reports  shall  be  made  public.  In 
addition,  full  reports  shall  be  made  to  the  Comptroller  of  the 
Currency  coincident  with  the  five  reports  called  for  each  year 
from  the  national  banks. 

All  reports  of  national-bank  examiners  in  regard  to  the  con- 
dition of  national  banks  shall  hereafter  be  made  in  duplicate, 
and  one  copy  shall  be  filed  with  the  Reserve  Association  for 
the  confidential  use  of  its  executive  officers. 


THE  ALDRICH   PLAN  469 

National  banks  of  all  classes  shall  hereafter  make  a  weekly 
report  to  the  Comptroller  of  the  Currency,  showing  the  principal 
items  of  their  balance  sheets,  such  reports  to  be  available  for  the 
use  of  the  executive  officers  of  the  Reserve  Association. 

Note  Issues 

There  is  hereafter  to  be  no  further  issue,  beyond  the  amount 
now  outstanding,  of  bank  notes  by  national  banks.  National 
banks  may,  if  they  choose,  maintain  their  present  note  issue, 
but  whenever  a  bank  retires  the  whole  or  any  part  of  its  exist- 
ing issue  it  will  permanently  surrender  its  right  to  reissue  the 
notes  so  retired. 

The  Reserve  Association  must,  for  a  period  of  one  year, 
offer  to  purchase  at  a  price  not  less  than  par  and  accrued  inter- 
est the  2  per  cent  bonds  now  held  by  national  banks  and 
deposited  to  secure  their  circulating  notes.  The  Reserve  Asso- 
ciation shall  take  over  these  bonds  with  the  existing  currency 
privilege  attached  and  assume  responsibility  for  the  redemption 
(upon  presentation)  of  outstanding  notes  secured  thereby.  The 
Reserve  Association  shall  issue,  on  the  terms  hereiil  provided, 
its  own  notes  as  fast  as  the  outstanding  notes  secured  by  such 
bonds  so  held  shall  be  presented  for  redemption,  it  being  the 
policy  of  the  United  States  to  retire  as  rapidly  as  possible,  con- 
sistent with  the  public  interests,  bond-secured  circulation  and  to 
substitute  therefor  notes  of  the  Reserve  Association  of  a  char- 
acter and  secured  and  redeemed  in  the  manner  provided  for  in 
this  act. 

The  Reserve  Association  agrees  to  hold,  for  a  period  of  not 
less  than  ten  years,  the  bonds  so  purchased,  or  any  government 
security  which  may  be  exchanged  for  them  by  refunding  or 
otherwise.  .The  Reserve  Association,  however,  shall  have  the 
right,  with  the  approval  of  the  Secretary  of  the  Treasury,  after 
two  years  to  dispose  annually  of  $50,000,000  of  the  bonds  held 


470  APPENDIX 

by  it  to  secure  circulation.  The  government  reserves  the  right 
at  all  times  to  purchase  at  par  from  the  Reserve  Association, 
through  the  trustees  of  the  postal  savings  bank  or  otherwise, 
any  or  all  of  such  bonds  so  held. 

If  the  government  should  adopt  the  policy  of  issuing  securi- 
ties at  a  higher  rate  of  interest  than  2  per  cent,  the  Reserve 
Association  shall  have  the  right  to  exchange  at  par  the  govern- 
ment bonds  which  it  may  have  acquired  from  the  national  banks, 
previously  held  by  them  to  secure  circulation,  for  any  bonds 
bearing  interest  at  a  rate  not  exceeding  3  per  cent ;  but  in  that 
event  the  amount  of  annual  taxes  to  be  paid  on  notes  based 
upon  such  new  securities  shall  be  as  much  greater  as  the  interest 
rate  of  the  new  securities  shall  exceed  2  per  cent. 

To  illustrate :  If  the  government  should  decide  hereafter  to 
issue  a  2  ^  per  cent  bond,  the  rate  of  taxation  on  currency  issued 
by  the  Reserve  Association  thereon  would  be  i  per  cent,  instead 
of  one-half  of  i  per  cent,  as  on  the  existing  twos,  and  upon  a 
3  per  cent  bond  the  rate  of  taxation  would  be  i^  per  cent. 

In  addition  to  the  authority  to  issue  notes  to  replace  any 
national-bank  notes  outstanding  at  the  time  of  the  organization 
of  the  Reserve  Association,  it  shall  have  the  right  to  issue 
additional  circulating  notes  as  follows :  The  whole  or  any  part 
of  the  first  $100,000,000  of  such  additional  notes  shall  pay  to 
the  government  an  annual  tax  of  3  per  cent ;  above  $100,000,- 
000  and  not  more  than  $200,000,000  may  be  issued  at  an 
annual  tax  of  4  per  cent;  above  $200,000,000  and  not  more 
than  $300,000,000  may  be  issued  at  an  annual  tax  of  5  per  cent; 
all  above  $300,000,000  shall  pay  an  annual  tax  of  6  per  cent. 

All  note  issues  of  the  Reserve  Association  must  be  covered 
to  the  extent  of  at  least  one-third  by  gold  or  other  lawful  money, 
and  the  remaining  portion  by  bonds  of  the  United  States  or 
bankable  commercial  paper  as  herein  defined,  or  both.  (It 
should  be  provided  either  that  the  Reserve  Association  may 
also  hold  in  its  reserve  foreign  coin,  or  that  the  Treasury  will 


THE  ALDRICH   PLAN  4/1 

issue  gold  certificates  against  foreign  coin.)  The  notes  are  to 
constitute  a  first  lien  upon  all  the  assets  of  the  Reserve  Asso- 
ciation, and  adequate  provision  must  be  made  for  their  immedi- 
ate redemption  in  lawful  money  on  presentation  at  the  head 
office  of  the  Reserve  Association  or  any  of  its  branches. 

The  notes  of  the  Reserve  Association  shall  be  received  at 
par  in  payment  of  all  taxes,  excises,  and  other  dues  to  the 
United  States,  and  for  all  salaries  and  other  debts  and  demands 
owing  by  the  United  States  to  individuals,  corporations,  or 
associations,  except  obligations  of  the  government  which  are 
by  their  terms  specifically  payable  in  gold,  and  for  all  debts 
due  from  or  by  one  national  bank  to  another,  and  for  all 
obligations  due  to  a  national  bank. 

The  Reserve  Association  shall  at  once,  upon  application  and 
without  charge  for  transportation,  forward  its  circulating  notes 
to  any  depositing  bank  against  its  credit  balance. 


The  currency  committee  of  the  American  Bankers'  Associa- 
tion has  examined  the  Aldrich  plan  and  has  recommended  some 
modifications  of  it.  These  comprise,  among  other  suggestions, 
the  appointment  of  the  governor  and  two  deputy  governors 
of  the  Reserve  Association  by  the  board  of  directors  instead  of 
by  the  President,  of  the  United  States,  and  the  preparation  and 
enactment  of  some  definite  plan  for  refunding  the  government's 
2  per  cent  bonds  now  pledged  against  national-bank  circulation, 
before  the  central  organization  shall  take  them  over  from 
the  banks. 

A  subcommittee  of  the  currency  committee,  to  whom  was  re- 
ferred the  subject  of  enabling  state  banks,  trust  companies,  and 
savings  banks  to  share  in  the  benefits  of  the  Aldrich  plan,  has 
made  a  report  embracing  the  following  recommendations : 

"  That,  a  bank  or  a  savings  bank  which  is  incorporated  under 
the  laws  of  any  state,  in  accordance  with  the  requirements  of 
which  it  has  been  examined  and  has  published  statements  "of 


472  APPENDIX 

its  condition,  •or,  in  the  absence  of  such  requirements  of  state 
laws,  upon  approval  of  the  executive  committee  of  the  National 
Reserve  Association,  may  subscribe  to  the  capital  stock  of  the 
National  Reserve  Association  in  the  same  manner  and  under  the 
same  conditions  as  prescribed  for  national  banks,  and  such  sub- 
scribing bank  shall  become  a  member  of  a  local  association  and 
have  the  same  rights  and  privileges  therein  as  if  it  were  a  national 
bank ;  provided, 

"  That  it  shall  have  a  paid-in  capital  of  not  less  than  that 
required  for  a  national  bank  in  the  same  location. 

"  That  it  shall  have  and  agree  to  maintain  against  its  demand 
deposits  a  reserve  of  like  character  and  proportion  required  of  a 
national  bank  in  the  same  location ;  provided,  however,  that 
deposits  which  it  may  have  with  a  state  bank,  a  savings  bank, 
or  a  trust  company,  in  a  city  designated  in  the  National  Banking 
Act  as  a  reserve  city  or  a  central  reserve  city,  whose  paid-in  cap- 
ital is  not  less  than  the  minimum  amount  required  for  a  national 
bank  in  such  city,  and,  in  the  case  of  a  trust  company,  not  less 
than  that  hereinafter  specified  for  a  trust  company  in  such  city, 
and  which  is  a  member  of  a  local  association,  shall  count  as  re- 
serve in  like  manner  and  to  the  same  extent  as  similar  deposits  of 
a  national  bank  with  national  banks  in  such  cities.  Provided  fur- 
ther that  liabilities  for  deposits  payable  beyond  thirty  days,  and  for 
savings  deposits  subject  to  notice  of  sixty  days  or  more  shall  not  be 
subject  to  the  reserve  requirements  provided  for  demand  deposits. 

"  That  it  shall  agree  to  submit  to  such  examinations  and  com- 
ply with  such  requirements  as  may  from  time  to  time  be  pre- 
scribed by  the  National  Reserve  Association. 

"  That  a  trust  company,  which  is  incorporated  under  the  laws 
of  any  state,  in  accordance  with  the  requirements  of  which  it  has 
been  examined  and  has  published  statements  of  its  condition,  or, 
in  the  absence  of  such  requirements  of  state  laws,  upon  approval 
of  the  executive  committee  of  the  National  Reserve  Association, 
may  subscribe  to  the  capital  stock  of  the  National  Reserve 


THE  ALDRICH  PLAN  4/3 

-Association  in  the  same  manner  and  under  the  same  conditions 
as  prescribed  for  national  banks,  and  such  subscribing  trust  conv 
pany  shall  become  a  member  of  a  local  association  and  have  the 
same  rights  and  privileges  therein  as  if  it  were  a  national  bank ; 
provided, 

"  That  a  trust  company  shall  have  an  unimpaired  surplus  of 
not  less  than  20  per  cent  of  its  capital,  and,  if  located  in  a  city, 
of  25,000  inhabitants  or  less,  shall  have  a  paid-in  capital  of  not 
less  than  $  1 00,000,  and  in  a  larger  city  a  proportionately  greater 
capital  up  to  $500,000  in  a  city  of  500,000  inhabitants  or  more. 

"  That  it  shall  have,  and  agree  to  maintain  against  its  demand 
deposits,  a  reserve  of  like  character  and  proportion  required  of  a 
national  bank  in  the  same  location;  provided,  however,  that 
deposits  which  it  may  have  with  a  state  bank,  a  savings  bank,  or 
a  trust  company,  in  a  city  designated  in  the  National  Banking 
Act  as  a  reserve  city  or  a  central  reserve  city,  whose  paid-in  cap- 
ital is  not  less  than  the  minimum  amount  required  for  a  national 
bank  in  such  city,  and,  in  the  case  of  a  trust  company,  not  less 
than  that  heretofore  specified  for  a  trust  company  in  such  city, 
and  which  is  a  member  of  a  local  association,  shall  count  as  re- 
serve in  like  manner  and  to  the  same  extent  as  similar  deposits 
of  a  national  bank  with  national  banks  in  such  cities.  Provided 
further  that  liabilities  for  deposits  payable  beyond  thirty  days, 
for  savings  deposits  subject  to  notice  of  sixty  days  or  more,  and 
for  moneys  held  in  trust,  which,  under  the  conditions  of  the  trust, 
are  not  made  payable  within  thirty  days,  shall  not  be  subject  to 
the  reserve  requirements  provided  for  demand  deposits. 

"  That  it  shall  agree  to  submit  to  such  examinations  and  com- 
ply with  such  requirements  as  may  from  time  to  time  be  pre- 
scribed by  the  National  Reserve  Association. 

"  That  a  mutual  savings  bank  which  is  incorporated  under  the 
laws  of  any  state,  in  accordance  with  the  requirements  of  which 
it  has  been  examined,  and  has  published  statements  of  its  con- 
dition, or,  in  the  absence  of  such  requirements  of  state  laws,  upon 


474  APPENDIX 

approval  of  the  executive  committee  of  the  National  Reserve 
Association,  may  subscribe  to  an  amount  of  capital  stock  of  the 
National  Reserve  Association  equal  to  20  per  cent  of  the  sur- 
plus of  such  subscribing  bank,  and  not  less,  subject  to  the  same 
conditions  of  ownership  under  which  such  stock  may  be  owned 
by  a  national  bank,  and  such  subscribing  bank  shall  become  a 
member  of  a  local  association  and  have  the  same  rights  and 
privileges  therein  as  if  it  were  a  national  bank ;  provided, 

"  That  a  mutual  savings  bank  shall  have  an  unimpaired  sur- 
plus of  not  less  than  the  amount  which  would  be  required  for 
the  capital  of  a  national  bank  in  the  same  location. 

"  That  it  shall  have  and  agree  to  maintain  against  its  demand 
deposits  a  reserve  of  like  character  and  proportion  required  of  a 
national  bank  in  the  same  location ;  provided,  however,  that 
deposits  which  it  may  have  with  a  state  bank,  a  savings  bank, 
or  a  trust  company  in  a  city  designated  in  the  National  Banking 
Act  as  a  reserve  city  or  a  central  reserve  city,  whose  paid-in  cap- 
ital is  not  less  than  the  minimum  amount  required  for  a  national 
bank  in  such  city,  and,  in  the  case  of  a  trust  company,  not  less 
than  that  heretofore  specified  for  a  trust  company  in  such  city, 
and  which  is  a  member  of  a  local  association,  shall  count  as  re- 
serve in  like  manner,  and  to  the  same  extent  as  similar  deposits 
of  a  national  bank  with  national  banks  in  such  cities.  Provided 
further  that  liabilities  for  deposits  payable  beyond  thirty  days, 
and  for  savings  deposits  subject  to  notice  of  sixty  days  or  more, 
shall  not  be  subject  to  the  reserve  requirements  provided  for 
demand  deposits. 

"  That  it  shall  agree  to  submit  to  such  examinations  and  com- 
ply with  such  requirements  as  may  from  time  to  time  be  pre- 
scribed by  the  National  Reserve  Association. 

"  That  as  its  surplus  increases  or  diminishes,  it  shall,  upon 
request  of  the  executive  committee  of  the  National  Reserve 
Association,  proportionately  increase  or  decrease  its  holdings  of 
capital  stock  of  the  National  Reserve  Association." 


APPENDIX  C 

GUARANTEEING  BANK  DEPOSITS 

In  February,  1908,  the  state  legislature  of  Oklahoma  passed 
a  law  to  guarantee  the  payment  of  deposits  in  banks  which 
should  become  insolvent  by  embezzlement,  bad  management, 
or  otherwise.  It  provided  that  each  bank  organized  under  the 
law  of  that  state  must  contribute  a  sum  equal  to  i  per  cent  of 
its  individual  deposits,  which  should  be  collected  and  held  by 
the  state  authorities  for  the  purpose  mentioned.  Under  this  law 
the  sum  of  $150,000  was  collected,  of  which  $110,000  was  in- 
vested in  state  warrants  and  the  remainder  deposited  in  banks 
at  3  per  cent  interest. 

The  novelty  of  this  proposal  attracted  the  attention  of  poli- 
ticians in  the  presidential  campaign  of  that  year,  and  led  to  the 
adoption  of  a  clause  in  the  Democratic  national  platform,  which 
pledged  the  party  to  "  legislation  under  which  the  national 
banks  should  be  required  to  establish  a  guaranty  fund  for  the 
prompt  payment  of  the  depositors  of  any  insolvent  national 
bank,  under  an  equitable  system  which  should  be  available  to 
all  state  banking  institutions  wishing  to  use  it." 

National  banks  were  allowed  by  the  law  of  Oklahoma  to 
participate  in  the  operation  of  the  deposit  guaranty,  if  they 
desired  to  do  so.  The  question  as  to  whether  the  national  bank- 
ing law  authorized  such  participation  was  referred  to  the  At- 
torney-General of  the  United  States  (Mr.  Bonaparte),  who  gave 
an  opinion,  July  28,  1908,  that  such  participation  would  be  an 
exercise  of  powers  not  granted  by  act  of  Congress,  and  hence 
unlawful. 

475 


4/6  APPENDIX 

The  Columbia  Bank  and  Trust  Co.,  of  Oklahoma  City,  hav- 
ing a  capital  of  $200,000,  failed  September  28,  1909.  Its  deposit 
liabilities  amounted  to  $2,900,000.  It  had  cash  and  sight  ex- 
change to  the  amount  of  $1,134,000.  The  bank  commissioner  of 
the  state  took  charge  of  it  and  began  to  pay  the  depositors  as 
required  by  law.  The  funds  in  hand  were  not  sufficient  for  this 
purpose,  even  with  the  whole  of  the  deposit  guaranty  fund  added. 
It  became  necessary  to  discriminate  between  depositors.  Those 
whose  claims  were  smallest  were  paid  first.  On  October  30,  1909, 
$411,000  of  deposits  were  still  unpaid,  although  $503,000  of 
the  guaranty  fund  had  been  used,  of  which  $248,000  had  been 
obtained  by  a  special  assessment  on  the  banks.  Thus  the  Okla- 
homa guaranty  system  proved  a  disappointment  in  a  test  case 
occurring  less  than  two  years  after  its  enactment. 

The  total  net  collections  for  the  guaranty  fund  up  to  Janu- 
ary I,  191 1,  were  $818,740,  and  the  amount  remaining  in  it  at 
that  date  was  $333,787,  the  net  loss  to  the  fund  being  $484,- 
953.  An  emergency  assessment  of  i  per  cent  was  announced 
March  i ,  1 9 1 1 .  Thirty  state  banks  soon  thereafter  entered  the 
national  system,  four  were  merged  with  national  banks,  and 
sixty-five  others  made  application  to  enter  the  national  system. 
It  is  too  early  as  yet  to  say  whether  the  Oklahoma  deposit 
guaranty  system  is  a  failure.  Mr.  Thornton  Cooke,  after  an 
elaborate  review  of  it,  reaches  the  conclusion  that  the  state 
cannot  undertake  to  pay  deposits  in  full  as  soon  as  a  bank 
closes ;  that  the  insurance  of  bank  deposits  assists  the  growth 
of  bad  banks  as  well  as  good ;  and  that  under  a  state  deposit- 
insurance  system  the  risk  that  will  be  assumed  on  a  single  bank 
cannot  be  limited.^ 

Kansas,  Nebraska,  South  Dakota,  and  Texas  followed  the 
example  of  Oklahoma  by  passing  deposit-guaranty  laws  with 

1  See  articles  on  "  Insurance  of  Bank  Deposits  in  the  West,"  by 
Thornton  Cooke,  in  the  Quarterly  Journal  of  Economics,  November, 
1909,  and  February,  19 10. 


GUARANTEEING  BANK  DEPOSITS  4// 

some  variations.  Under  the  Kansas  law  the  question  of  the 
participation  of  national  banks  was  again  referred  to  the  At- 
torney-General of  the  United  States  (Mr.  Wickersham),  and 
was  again  decided  in  the  negative. 

The  Nebraska  law  prohibits  individuals  from  engaging  in  the 
banking  business  unless  they  do  so  through  the  agency  of  a 
corporation,  and  provides  that  every  such  corporation  shall 
make  contributions  to  a  depositors'  guaranty  fund  for  the  pay- 
ment of  the  claims  of  depositors  in  any  state  bank  which  shall 
become  insolvent.  This  act  did  not  apply  to  national  banks. 
It  was  immediately  attacked  by  litigation  in  the  United  States 
Circuit  Court  for  the  district  of  Nebraska,  by  which  tribunal  it 
was  pronounced  unconstitutional  and  void,  as  in  conflict  with 
section  i  of  the  Fourteenth  Amendment  to  the  Constitution  of 
the  United  States,  which  provides  that  no  state  shall  deprive 
any  person  of  life,  liberty,  or  property,  without  due  process 
of  law. 

The  Kansas  act  was  more  lenient  than  those  of  Oklahoma 
and  Nebraska.  It  did  not  compel  any  banks  to  enter  into  the 
deposit-guaranty  scheme,  but  authorized  a  majority  of  the  stock- 
holders of  any  bank  to  decide  the  question  of  entering  and  to 
apply  the  money  of  a  dissenting  minority  to  the  payment  of  the 
depositors  of  other  banks  which  should  become  insolvent.  The 
Kansas  law  also  makes  distinctions  between  different  kinds  of 
banks  and  different  kinds  of  deposits  which  may  be  admitted 
to  participation  in  the  guaranty.  Thus  all  banks  are  excluded 
which  have  not  a  surplus  equal  to  lo  per  cent  of  their  capital, 
and  all  which  have  not  been  in  operation  for  one  year ;  also  all 
deposits  subject  to  check  on  which  any  interest  is  allowed,  and  all 
time  deposits  on  which  more  than  3  per  cent  interest  is  allowed,  all 
savings  deposits  exceeding  $100,  and  all  savings  deposits  of  any 
amount  if  subject  to  withdrawal  without  notice ;  also  all  deposits 
which  arise  from  the  discount  of  commercial  paper,  and  all  that 
have  any  security  other  than  that  of  the  Bank  Guaranty  Law. 


478  APPENDIX 

Notwithstanding  these  safeguards  the  law  was  immediately 
called  in  question  in  the  United  States  District  Court  for  Kansas. 
On  the  24th  of  December,  1909,  the  court  granted  two  injunc- 
tions restraining  the  State  Bank  Commissioner  from  enforcing 
the  law.  One  case  was  that  of  Frank  S.  Larabee,  a  stockholder 
in  the  Exchange  State  Bank  of  Hutchinson.  -His  contention 
was  that  a  stockholder  in  a  state  bank  can  object  and  prevent 
the  participation  of  his  bank  in  the  guaranty  law.  The  court 
upheld  this  contention.  The  other  case  was  that  of  the  Abilene 
National  Bank  against  the  Bank  Commissioner  and  State  Treas- 
urer on  the  ground  that  the  state  guaranty  law  is  unconstitu- 
tional. The  court  granted  a  temporary  injunction  in  this  case, 
holding  the  law  inoperative.  January  3,  191 1,  the  Supreme 
Court  of  the  United  States  decided  that  the  laws  of  Oklahoma, 
Nebraska,  and  Kansas  for  guaranteeing  bank  deposits  were 
constitutional  and  valid. 

The  South  Dakota  law  is  not  compulsory.  Every  bank  enter- 
ing the  deposit-guaranty  system  must  make  an  initial  payment 
of  one-tenth  of  i  per  cent  on  its  deposits  for  the  first  three 
months  and  one-tenth  of  i  per  cent  annually  thereafter  until 
the  same  is  discontinued  or  changed  by  the  state  board  of  com- 
missioners. Special  assessments  not  exceeding  four-tenths  of 
I  per  cent  in  any  one  year  may  be  made  in  cases  of  emergency. 

Under  the  Texas  law  all  incorporated  banks,  operating  under 
the  general  banking  law  of  the  state,  must  make  depositors 
secure  either  by  a  guaranty  fund  or  by  furnishing  a  guaranty 
bond,  the  latter  to  be  executed  by  three  approved  individuals 
or  by  one  approved  surety  corporation.  The  initial  assess- 
ment for  the  guaranty  fund  is  i  per  cent  of  deposits  and  one- 
fourth  of  I  per  cent  annually  thereafter  till  the  fund  equals 
$2,000,000. 

From  the  economic  point  of  view  the  deposit-guaranty  law 
has  little  ground  to  stand  upon.  The  New  York  Safety  Fund 
system  of  1829,  which  provided  for  the  payment  of  all  the  debts 


GUARANTEEING  BANK  DEPOSITS  4/9 

of  failed  banks  by  a  common  fund,  broke  down  in  practice  in 
the  first  serious  strain  put  upon  it,  and  the  state  acknowledged 
its  inadequacy  by  providing  that  thereafter  the  fund  should  be 
used  only  for  the  redemption  of  circulating  notes.  If  the  Okla- 
homa law  had  been  in  force  before  the  panic  of  1907,  it  would 
have  failed  in  like  manner.  If  the  Oklahoma  system  had  been 
embodied  in  the  National  Banking  Act  prior  to  1907,  it  would 
have  failed  on  a  larger  scale  in  that  emergency. 

The  selection  of  a  place  in  which  to  deposit  one's  money 
ought  to  require  the  exercise  of  care  and  discrimination  on  the 
part  of  the  depositor.  Any  provision  by  the  state,  which  saves 
him  from  the  need  of  discriminating,  puts  good  bankers  and  bad 
ones  on  the  same  level.  It  even  gives  the  speculating  banker 
an  advantage  by  enabling  him  to  tempt  depositors  by  the  offer 
of  high  rates  of  interest  on  deposits,  and  to  make  risky  invest- 
ments. The  essential  difference  between  the  guaranty  of  deposits 
and  that  of  circulating  notes  is  that  the  depositor  is  an  individual, 
who  may  exercise  a  choice,  while  the  noteholders  are  the  whole 
community,  who  have  neither  time  nor  ability  to  discriminate 
between  the  different  kinds  of  currency  afloat. 

It  is  true  that  some  depositors  who  have  exercised  ordinary 
intelligence  in  their  choice  of  banks  have  made  mistakes.  This 
happens  also  to  shareholders  who  have  invested  their  money  in 
bank  stocks.  The  losses  of  depositors  and  those  of  shareholders 
in  consequence  of  bank  failures  have  been  about  equal  in  the 
aggregate  during  the  forty-five  years  of  the  national  banking 
system,  —  about  $32,000,000  for  each.  No  valid  reason  exists 
why  the  government  should  intervene  to  protect  one  class  more 
than  the  other,  seeing  that  the  business  relations  entered  into 
between  them  have  been  voluntarily  assumed.  Nor  is  there  any 
reason  why  the  government  should  take  pains  to  secure  the 
claims  of  depositors  against  bankers,  rather  than  those  of  bankers 
against  borrowers,  or  those  of  wage  earners  against  employers. 
These  considerations  become  more  weighty  when  the  government 


48o  APPENDIX 

seeks  to  accomplish  this  end  with  the  money  of  persons  who 
have  had  no  agency  in  causing  the  bank  failures. 

The  controversy  over  the  deposit-guaranty  laws  has  given 
birth  to  a  method  of  protecting  depositors  by  private  insurance 
companies.  This  is  a  perfectly  proper  business,  as  legitimate  as 
life,  fire,  marine,  accident,  or  mortgage  insurance.  It  has  been 
held  admissible  for  national  banks  by  the  Attorney-General  of 
the  United  States,  and  as  lawful  by  the  courts  in  cases  which 
have  been  litigated.  The  statistics  of  bank  mortality  are  now 
ample  for  a  computation  of  the  risk  assumed  in  such  under- 
writing. It  remains  to  be  seen,  however,  whether  the  demand 
for  it  is  sufficient  to  make  the  business  profitable.  From  all 
points  of  view  it  is  to  be  preferred  to  the  deposit-guaranty 
laws  of  states. 


APPENDIX  D 

THE  FEDERAL  RESERVE  BILL 

On  June  26,  19 13,  a  bill  proposing  radical  changes  in  our 
banking  and  currency  system  was  introduced  in  Congress  by 
Representative  Glass  of  Virginia  and  Senator  Owen  of  Okla- 
homa, chairmen  of  the  committees  having  charge  of  that  sub- 
ject in  the  two  houses  respectively.  At  the  same  time  the 
announcement  was  made  that  it  had  the  sanction  of  Presi- 
dent Wilson,  but  that  it  was  open  to  amendment  like  other 
measures  before  Congress.  It  was  referred  to  the  two  com- 
mittees ;  they  proposed  numerous  amendments,  some  of  which 
have  been  adopted,  while  others  are  still  pending.  The  principal 
features  of  the  bill,  as  first  introduced,  are  these : 

Federal  Reserve  Banks 

It  provides  for  the  organization  of  "  not  less  than  twelve  " 
federal  reserve  districts,  in  which  there  shall  be  established 
twelve  federal  reserve  banks,  to  which  national  banks  are  re- 
quired to  subscribe  the  capital  to  the  extent  of  20  per  cent 
of  their  own  capital,  one-half  to  be  paid  in  cash,  the  other  half 
to  be  subject  to  call.  The  minimum  capital  of  any  federal  re- 
serve bank  shall  be  $5,000,000.  Dividends  of  5  per  cent  per 
annum  on  the  stock  so  subscribed  shall  be  paid  if  earned.  All 
other  profits  shall  go  to  the  public  treasury. 

Each  federal  reserve  bank  shall  exercise  the  banking  powers 
of  existing  national  banks  and  shall  be  managed  by  nine  direc- 
tors. Three  of  these  shall  be  chosen  by  the  stockholding  banks 
from  their  own  membership;    three  shall  be  chosen  in  like 

481 


482  APPENDIX 

manner  to  be  representatives  of  general  public  interests  (mean- 
ing thereby  the  commercial,  agricultural,  and  industrial  interests 
of  their  respective  districts),  but  not  to  be  officers  or  directors 
of  any  bank ;  and  three  shall  be  chosen  by  the  federal  reserve 
board  at  Washington  city  —  one  of  the  latter  three  to  be  desig- 
nated by  the  federal  board  as  chairman  of  the  board  of  nine 
and  as  "  federal  reserve  agent." 

Federal  Reserve  Board 

The  federal  reserve  board  is  to  consist  of  seven  members. 
The  Secretary  of  the  Treasury,  the  Secretary  of  Agriculture,  and 
the  Comptroller  of  the  Currency  are  to  be  ex  officio  members. 
The  other  four  members,  "  one  of  whom  shall  be  experienced  in 
banking,"  are  to  be  chosen  by  the  President  of  the  United  States 
with  the  consent  of  the  Senate.  The  Secretary  of  the  Treasury 
is  to  be  chairman  of  the  board.  The  federal  reserve  board  is 
to  have  power  to  require  any  federal  reserve  bank  to  rediscount 
the  paper  of  any  other  federal  reserve  bank,  and  also  to  fix 
a  minimum  rate  of  interest. 

Rediscounts;  Deposits;  Treasury  Notes 

Section  13  authorizes  any  federal  reserve  bank  to  receive 
deposits  from  any  of  its  own  stockholders  and  to  rediscount  for 
any  member  bank  the  commercial  paper  of  such  member,  sub- 
ject to  certain  conditions  as  to  the  nature  of  the  security  and 
the  time  of  maturity  thereof.  Any  federal  reserve  bank  may 
establish  branches  in  foreign  countries,  with  the  consent  of 
the  federal  reserve  board. 

All  moneys  belonging  to  the  general  fund  of  the  United 
States  Treasury  shall  be  deposited  in  the  federal  reserve  banks, 
and  the  Secretary  of  the  Treasury  may  at  his  discretion  charge 
interest  thereon  at  a  rate  to  be  fixed  by  himself.  No  federal 
reserve  bank  shall  pay  interest  upon  any  deposits  except  those 


THE  FEDERAL  RESERVE   BILL  483 

of  the  United  States.  The  Government  of  the  United  States 
and  the  banks  depositing  in  the  federal  reserve  banks  shall  be 
the  only  depositors  in  the  federal  reserve  banks. 

Section  17  authorizes  an  issue  of  federal  reserve  treasury 
notes  not  to  exceed  $500,000,000.  Such  notes  shall  purport 
on  their  faces  to  be  the  obligations  of  the  United  States,  and 
shall  be  issued  at  the  discretion  of  the  federal  reserve  board 
and  solely  for  the  purpose  of  making  advances  to  the  federal 
reserve  banks  on  the  security  of  commercial  paper  rediscounted 
by  them.  They  shall  be  redeemable  in  gold  on  demand  at  the 
Treasury  Department  in  Washington  or  at  any  federal  reserve 
bank.  The  amount  of  such  notes  so  issued  to  any  such  bank 
shall  become  a  first  lien  on  all  its  assets. 

Section  20  provides  for  the  gradual  retirement  of  the  present 
bond-secured  national  bank  notes  and  the  refunding  of  the  2  per 
cent  government  bonds  pledged  as  security  for  them  into  3  per 
cent  bonds  payable  after  twenty  years.  It  makes  no  such  pro- 
vision for  the  2  per  cent  bonds  held  by  private  persons. 

Bank  Reserves 

Section  21  provides  that  every  national  bank  shall  keep  a 
credit  balance,  equal  to  5  per  cent  of  its  total  demand  liabilities 
exclusive  of  circulating  notes,  as  a  deposit  in  the  federal  reserve 
bank  of  its  district.  This  is  a  part  of  its  legal  reserve,  and  this 
part  shall  never  fall  below  5  per  cent.  Country  banks,  outside 
of  reserve  cities,  are  required  to  maintain  a  total  reserve  of  15 
per  cent ;  banks  in  reserve  cities,  20  per  cent. 

State  banks  and  trust  companies  having  a  capital  not  less 
than  that  required  for  national  banks  under  existing  law  may 
be  admitted  to  the  same  privileges  as  national  banks. 

Section  23  provides  that  every  federal  reserve  bank  shall  at 
all  times  have  on  hand  in  its  own  vaults,  in  gold  or  lawful  money, 
a  sum  equal  to  not  less  than  ^^^  per  cent  of  its  demand 
liabilities. 


4B4  APPENDIX 

The  federal  reserve  treasury  notes  are  not  legal  tender. 

Section  27  permits  national  banks  not  in  reserve  cities  to 
make  mortgage  loans,  for  not  more  than  nine  months,  on 
improved  farm  lands. 

Comment 

The  foregoing  bill  compels  each  existing  national  bank  to 
invest  one-fifth  of  its  capital,  and  place  5  per  cent  of  its  deposits, 
in  a  new  kind  of  bank,  where  the  profits  cannot  exceed  5  per 
cent  and  may  be  less.  The  new  banks  are  to  be  controlled  by 
a  board  of  seven  persons  at  Washington  city,  only  one  of  whom 
need  be  a  banker  or  acquainted  with  banking  science,  and  none 
of  the  appointees  are  to  be  selected  by  the  bankers  whose 
property  they  control.  In  other  words,  the  control  of  bank 
property  is  separated  from  the  ownership,  contrary  to  all  Anglo- 
Saxon  precedents  and  custom.  This  is  the  system  of  the  Imperial 
Bank  of  Germany,  with  the  difference  that  the  latter  is  less 
liable  to  change  of  personnel  of  the  bank  directorate.  That 
membership  of  the  fedetal  reserve  board  would  eventually  become 
a  part  of  the  spoils  of  politics,  however  free  from  that  taint  it 
might  be  in  the  beginning,  all  our  experience  shows.  On  this 
subject  Mr.  James  B.  Forgan,  of  Chicago,  justly  remarks : 

"  Banking  and  politics  are  like  oil  and  water,  they  do  not 
mix.  If  the  former  is  to  be  kept  sound  and  good,  it  must  be 
kept  separate  from  the  latter.  The  principles  underlying  sound 
banking  are  diametrically  opposed  to  those  which  rightly  or 
wrongly  seem  to  control  politics.  In  their  fiduciary  capacity, 
bankers,  if  they  wish  to  succeed  and  be  faithful  to  their  trust, 
must  constantly  be  on  their  guard  against  the  influence  of  such 
virtues  even  as  friendship  and  human  sympathy,  and  they  must 
officially  eschew  the  insidious  influence  of  reciprocal  personal 
favors.  Such  influences  seem  to  be  of  the  essence  of  politics 
and  to  control  political  activities." 

That  the  framers  of  this  bill  had  for  their  chief  purpose  the 


THE   FEDERAL  RESERVE  BILL  485 

conservation  and  economical  use  of  bank  reserves  is  evident 
from  the  name  which  they  have  given  to  their  measure.  They 
have  aimed  to  prevent  the  depletion*  of  cash  reserves  in  times 
of  panic ;  that  is,  runs  on  banks  by  depositors  and  by  some 
banks  on  others,  leading  to  bank  suspension,  more  or  less  com- 
plete. To  this  end  they  have  provided  twelve  reservoirs  for  the 
collection  of  bank  reserves,  which  is  certainly  better  than  twelve 
thousand.  After  the  system  goes  in  force  there  will  be  one 
reserve  bank  in  each  district  to  which  the  lesser  banks  of  the 
district  can  look  for  help  in  an  emergency.  There  is  no  certainty 
that  the  twelve  will  not  make  runs  on  each  other. 

The  Currency  Commission  of  the  American  Bankers  Associa- 
tion, having  been  asked  by  a  sub-committee  of  the  Senate  to 
express  an  opinion  on  this  part  of  the  bill,  replied  in  the  following 
terms,  in  which  the  writer  of  this  book  concurs : 

"  Three  objections  to  the  regional  reserve  associations  occur 
to  us: 

"  First.  They  will  divide  the  cash  reserves  of  the  country  into 
as  many  different  ownerships  as  there  are  regional  associations. 
No  individual  bank  can  now  strengthen  its  cash  reserves  without 
at  the  same  time  and  to  the  same  extent  depleting  the  reserve 
of  some  other  bank ;  so  with  the  regional  reserve  associations, 
no  one  of  them  will  be  able  to  strengthen  its  cash  reserves  with- 
out drawing  them  from  and  reducing  to  the  same  extent  the 
reserve  of  one  of  the  other  associations. 

"  Second.  In  connection  with  the  shipping  of  reserve  money 
from  one  section  of  the  country  to  another :  Under  one  central 
reserve  association  with  branches  this  could  be  accomplished 
without  change  of  ownership  of  the  money  shipped,  as  it  would 
belong  to  the  one  association  irrespective  of  what  branch  had 
custody  of  it.  In  the  case  of  independent  regional  reserve  asso- 
ciations no  such  transfer  of  reserve  money  could  be  made  from 
one  region  to  another  without  a  change  in  ownership.  It  would 
increase  the  reserve  of  the  association  that  receives  it  and  deplete 


486  APPENDIX 

by  a  similar  amount  the  reserve  of  the  association  that  ships  it. 
In  times  of  financial  stress  when  each  regional  reserve  associa- 
tion would  be  husbanding  its  resources  for  the  benefit  of  its 
own  constituents,  this  might  produce  an  undesirable  and  awk- 
ward situation,  the  interests  of  the  various  sections  of  the  country 
being  at  variance.  Such  effect  will  be  intensified  in  direct  ratio 
to  the  number  of  regional  reserve  associations." 

It  is  a  grave  objection  to  this  bill  that  it  makes  a  new  issue 
of  United  States  notes.  Instead  of  retiring  those  already  exist- 
ing, and  taking  the  government  out  of  the  banking  business 
altogether,  it  proposes  to  issue  federal  reserve  treasury  notes 
to  the  possible  limit  of  $500,000,000  against  commercial  paper 
secured  in  certain  ways.  Most  people  will  look  upon  these  notes 
as  a  new  issue  of  greenbacks,  and  we  shall  presently  have  a 
demand  for  more  notes  to  be  issued  directly  to  the  holders  of 
cotton,  breadstuffs  and  other  property  in  warehouses,  as  was 
demanded  by  the  Populists  twenty  years  ago.  Such  demands 
have  already  been  made  by  influential  members  of  Congress. 

There  is  serious  danger  that  the  passage  of  this  bill  may  put 
an  end  to  the  national  banking  system,  without  giving  birth  to 
any  other  system.  The  question  would  be  put  to  every  existing 
national  bank,  whether  it  would  risk  one-fifth  of  its  capital  and 
5  per  cent  of  its  deposits  in  the  new  federal  reserve  scheme, 
or  retire  from  the  national  system.  Of  course  any  future  Con- 
gress may  require  that  both  the  investment  and  the  deposit  be 
increased.  The  question,  therefore,  is  whether  the  existing  bank 
is  likely  to  acquiesce  in  a  future  mastery  over  its  entire  re- 
sources, which  its  acquiescence  now  would  imply.  The  banker 
will  not  be  alone  in  deciding  this  question.  Will  depositors  have 
confidence  in  the  new  style  of  banking  here  proposed  ?  If  not, 
they  will  silently  draw  out  their  money  from  the  new-style  banks 
and  deposit  it  elsewhere. 


INDEX 


Abrasion  of  coin,  24 
Acceptances,  208 
Accommodation  paper,  207 
Aldrich  Plan,  437,  457 
Aldrich-Vreeland  bill,  443 
Allison,  William  B.,  170 
Aristotle  on  the  origin  of  money,  2 
Attributes  of  good  money,  10-12 
Australia,  gold  production  of,  50, 54 
Austria-Hungary     adopts     gold 
standard,  69 

B 

Bank,  functions  of  a,  193-204; 
meaning  of  term,  193 ;  a  manu- 
factory of  credit,  194;  discounts, 
195 ;  deposits,  195 ;  reserves, 
197,  211  ;  circulating  notes,  198, 
335'  352  ;  utility  of,  199  ;  origin 
of,  200;  statement,  205-215; 
note  redemption  fund,  212,  353 

Banking,  colonial,  232-243  ;  early 
American,  244-253 

"  Banking  principle "  of  note 
issues,  297,  387 

Banking  system  :  Bank  of  Amster- 
dam, 233  ;  Bank  of  the  United 
States,  first,  254-265;  second, 
267-302 ;  Suffolk,  of  Massa- 
chusetts, 291-302  ;  safety  fund, 
303-310;  bond  deposit,  311- 
321  ;  Scotch,  378;  Canadian,  381 

Biddle,  Nicholas,  274-289 


Bills  of  credit,  colonial,  79-89 ; 
Revolutionary,  91-105  ;  post- 
Revolutionary,  104 

Bills  of  exchange,  208 

Bills  of  lading,  209 

Black  Friday,  128 

Bland,  R.  P.,  169 

Bond  reserves,  366 

Bonds  of  the  United  States,  no, 
117,  151,  182,  184,  351,  414 

Boutwell,  George  S.,  153 

Branch  banks,  272,  334,  379,  383, 
428 


California,  private  gold  coinage  of, 
8,  9 ;  first  gold  discovered  in, 
50 ;  present  production  of,  54  ; 
adheres  to  gold  standard,  1 29 ; 
specific  contract  law  in,  132 

Canadian  Bank  system,  381-385 

Carlisle,  John  G.,  177,  181-187 

Cash  credits,  208,  378 

Central  Bank  question,  433-442 

Certified  checks,  213 

Chaos  of  banking  in  the  XIX 
century,  322-332 

Chase,  Salmon  P.,  107-134,  348 

Clay,  Henry,  261,  283 

Clearing  house,  216-228;  loan 
certificates,  224 

Cleveland,  Grover,  as  President, 
calls  Congress  in  extra  session, 
180;  Venezuela  message  of,  186 


487 


488 


INDEX 


Coinage,  16-29;  coins  of  Massa- 
chusetts, 26 ;  first  United  States 
t 
coinage   act,   32 ;    second,   34 ; 

third,  36  ;  fourth,  37 
Collamer,  Jacob,  112 
Colonial  banking,  232-243 
Colorado,  gold  production  of,  52, 

54 
Commercial  crises,  178 
Comstock  lode,  50,  51 
Confederate  currency,  140-149 
Cortelyou,   George   B.,  Secretary 

of  the  Treasury,  41 1 
Counterfeit  notes,  328 
"  Crime  of  1873,"  168 
"  Currency    principle "    ^f    note 

issues,  298 


Deficit  in  the  Treasury,  161,  181, 

187 
Deposits,  195;   interest  on,  213; 

public,  269,  358,  407,  408 
Discount    of    commercial    paper, 

195,  206 

E 

Elasticity  of  note  issues,  316,  383 
"  Emergency  circulation,"  431 
England,  adopts  the  gold  standard, 

63  ;  Bank  of,  369-377 
Examiners  of  national  banks,  357 
Extension  of  public  debt,  404 

F 

Federal  Reserve  Bill,  481 
Fessenden,  William  Pitt,  112,  119 
Foreign  banking  systems,  369-399 
Forgan,  James  B.,  366,  367,  431, 

434 
Fractional  currency,  116 


France,  adopts  the  gold  standard, 

68  ;  Bank  of,  385-390 
Free  bank  system,  31 1-32 1 


Gallatin,  Albert,  259-265,  279 
Georgia,    banking    disorders    in, 

325 
Germany,  adopts  the  gold  stand- 
ard, 65  ;  Imperial  Bank  of,  390- 

394 

Gilbert,  Alexander,  425,  428 

Gold,  not  wholly  free  from  varia- 
tions of  value,  12;  bullion,  20; 
private  coins,  22  ;  mint  price  of, 
23  ;  as  a  metal,  41-48  ;  its  affinity 
for  quicksilver,  42  ;  placer,  42  ; 
hydraulic  mining  of,  44  ;  quartz 
crushing,  45  ;  chlorination,  46  ; 
cyanide  process,  46 ;  production, 
49-59 ;  effect  on  prices,  55 ; 
standard,  60-77  5  adopted  by 
England,  63 ;  by  the  United 
States,  64 ;  by  Germany,  65  ;  by 
Austria-Hungary,  [69 ;  by  India, 
72;  by  Japan,  72;  by  Russia, 
74 ;  by  France  and  the  Latin 
Union,  68 ;  by  Mexico,  75  ;  anti- 
gold  law,  119;  gold  exchange 
bank,  126;  gambling,  127;  con- 
tracts enforceable  notwithstand- 
ing legal-tender  act,  133;  imports' 
in  1879  ^^d  1880,  157  ;  in  1908, 
413;  the  Gold  Standard  Act  of 
1900,  161  ;  certificates,  164 

Grant,  U.  S.,  as  President,  vetoes 
the  Inflation  bill,  1 53 

Greenbacks,  106-139 

Gresham's  Law,  25 

Guaranteeing  Bank  Deposits,  475 


INDEX 


489 


Hamilton,  Alexander,  report  on 
the  mint,  31  ;  views  on  banking, 
196 ;  on  the  Bank  of  New  York, 
248  ;  on  first  Bank  of  the  United 
States,  254-257 

Hayes,  R.  B.,  elected  President  of 
the  United  States,  156;  vetoes 
Bland  silver  bill,  170 

Hepburn,  A.  B.,  364,  366 

Hepburn  case  in  the  Supreme 
Court,  134 


Illinois,  free  banks  of,  316 
India,  adopts  the  gold  standard, 

72;  stops  coining  silver,  178 
Indiana,  free  banks  of,  319;  State 

Bank  of,  333-338 
Inflation  bill,  153;  inflationists,  169 


Jackson,  Andrew,  President  of 
the  United  States,  276;  makes 
attack  on  Bank  of  the  United 
States,  278  ;  vetoes  charter,  286 ; 
removes  public  deposits,  287 

Japan  adopts  the  gold  standard,  72 

Jefferson,  Thomas,  opposes  char- 
ter of  the  first  Bank  of  the  United 
States,  256 

Julliard  vs.  Greenman  in  the  Su- 
preme Court,  135 


Kelley,  W.  D.,  169 
Kemmerer,  E.  W.,  56,  57 
Klondike,  gold  production  of,  52 
Knickerbocker    Trust    Company, 

411 
Knox,  John  J.,  36,  37 


Land  banking,  234 

Latin  Monetary  Union,  68 

Legal  tender,  30-40  ;  origin  ^of, 
30;  significance  of,  31  ;  law  of 
United  States  in  1792,  31  ;  in 
1834.  34;  in  1873,  36;  present 
varieties  of,  38;  act  of  1862, 
no;  ^150,000,000  notes  (green- 
backs) authorized,  no;  ^150,- 
000,000  additional  authorized, 
113;  $100,000,000  additional 
authorized,  115;  interest-bearing 
notes,  115;  compound-interest 
notes,  116;  effect  of,  on  wages, 
123  ;  on  prices  of  commodities, 
124;  legal-tender  cases  in  the 
Supreme  Court,  134 

Letters  of  credit,  209 

Liability  of  shareholders,  335-352 

Loans  and  discounts,  206 

"  Locofocos,"  311 

Louisiana  Bank  Act  of  1842,  343 

M 

McCulloch,  Hugh,    152,  335,  349 

McKinley,  William,  160 

Macleod,  H.  D.,  374 

Madison,  James,  268 

Manning,  Daniel,  173 

Massachusetts,  Land  Bank  Scheme 
in,  238 ;  Bank  of,  247  ;  general 
banking  law  of,  300 

Memminger,  C.  G.,  140-145 

Michigan,  "  wild-cat  banks "  in, 
326 

Mint  price  of  gold,  23 

Monetary  conference,  interna- 
tional, 76 

Money  of  account,  28 


490 


INDEX 


Morris,  Robert,  244 
Mortgage  loans,  338,  351 

N 

National  bank  system,  348-359 ; 
condition  on  August  22,    1908, 

359 

New  England  colonies,  early  cur- 
rency of,  6-7  ;  colonial  banking, 
experiments  in,  232-243 

New  London  Society  for  Trade 
and  Commerce,  236 

New  Netherland,  first  local  cur- 
rency of,  7 

New  York,  Bank  of,  248 

North  America,  Bank  of,  244 

North  Carolina,  chaos  of  banking 
in,  324 

Note  holders'  prior  lien  on  bank 
assets,  300,  306,  380,  382 


Ohio,  State  Bank  of,  343 
Oklahoma,  law  of,  for  guaranteeing 

bank  deposits,  475 
Origin  of  money,  2 


Panic  of  1893,  202;    of  1907,  411 
Paper  currency,  denominations  of, 

165 
Paris  Monetary  Conference,  76 
Pennsylvania    legislature    repeals 
charter  of  Bank  of  North  Amer- 
ica, 246 ;  reenacts  it,  247 
Pine-tree  shilling,  26 
Post  notes,  271 
Premium  on  currency,  413 
Present  problems,  425,  432 
Private' banks,  362 


Quantity  theory,  57 

R 

Receivers  of  national  banks,  357 
Reports  of  national  banks,  357 
Reserve  Association  of  America, 

437>  457 
Reserves,  banking,  197,  363,  366 
Rhode  Island,  81,  237 
Russia  adopts  the  gold  standard,  74 


Safety  fund  system,  303-310 

Scotch  bank  system,  378-381 

Seigniorage,  19 

Shaw,  Leslie  M.,  Secretary  of  the 
Treasury,  407-410 

Sherman,  John,  Senator,  154; 
Secretary  of  the  Treasury,  1 56 ; 
silver  act,  1 59 

Silver  dollar,  16;  in  panic  of  1893, 
167-192;  Bland  Act,  169  ;  Alli- 
son amendment,  170;  vetoed  by 
President  Hayes  and  repassed, 
170;  silver  certificates,  171; 
Sherman  Act  of  1 890, 175;  panic 
of  1893,  18°  5  coinage  of  bullion 
purchased  under  the  Sherman 
Act,  187  ;  total  coinage  under 
all  acts,  188 

Smith,  George,  338 

South  Africa,  gold  production  of, 

51 
South  Carolina,  rice  currency  in, 

Spanish  dollar,  25 

Spaulding,  E.  G.,  no 

Specie  payments,  suspensions  of. 

323 


INDEX 


491 


Specie  reserve,  in  Massachusetts, 
299  ;  in  Louisiana,  343 

Specie  resumption  act,  154;  un- 
successful attempt  to  repeal, 
155  ;  carried  into  effect,  156 

Specific  Contract  Law  in  Cali- 
fornia, 132 

Speculation  in  bank  charters,  322 

Standard  of  value,  18 

State  Banks,  361-368 

Stevens,  Thaddeus,  113 

Stock  Exchange  and  the  money 
market,  416-424 

Stock  notes,  291 

Subsidiary  coins,  16 

Suffolk  Bank  system,  291-302 

Supreme  Court  decisions,  133 

Surplus  of  banks,  214 


Taxes  on  circulating  notes,  354, 

392,  423 
Tennessee    and    Kentucky,    skin 

currency  in,  8 
Tobacco  currency,  3-5 
Token  coins,  16 
Trade  is  barter  even  when  money 

is  employed,  10;  trade  dollar,  t^j 
Treasury  Department,  divisions  of 

issue  and  redemption  in,  162 


Treasury  notes,  in  the  War  of 
1812,  106;  in  the  financial  crisis 
of  1837,  106;  in  the  war  with 
Mexico,  107  ;  of  the  Confederate 
States,  140-147;  of  1890,  159 

Trust  companies,  363-368 


Value,  standard  of,  18 
Venezuela  message  of  President 

Cleveland,  186 
Virginia,  tobacco  money  in,  3-5 

W 

Wampum,  2,  3,  7 

War  financiering,  122 

Washington,  George,  views  on 
bills  of  credit,  95,  96;  action 
on  first  Bank  of  the  United 
States,  256 

Webster,  Daniel,  267,  270 

Webster,  Pelatiah,  92,  97 

Wheat  harvest  of  1891,  176 

"  Wild-cat  banks,"  327 

Wisconsin,  free  banks  of,  319; 
Marine  and  Fire  Insurance  Com- 
pany, 339 

Witwatersrand,  gold  production 
of,  51 

Woodbury,  Levi,  300 


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Lloyd-George  Budget,  the  defeat  of  the  House  of  Lords, 
national  workmen's  insurance  —  a  veritable  revolution  in  con- 
temporary politics. 

Each  important  act  of  this  kind  is  here  treated  in  a  special 
chapter,  its  historical  setting  explained  by  the  editor,  the  text  of 
the  act  given,  and  extracts  inserted  from  some  of  the  liveliest 
speeches  of  Parliament  illustrative  of  the  various  arguments 
advanced  both  for  and  against  it.  To  the  historian,  the  social 
worker,  and  the  practical  economist  the  book  will  prove  invaluable. 


American  readers  owe  to  Carlton  Hayes  the  best  opportunity  they  have  yet 
had  for  becoming  acquainted  at  first  hand  with  the  details  of  recent  epoch-making 
legislation  on  social  problems  in  the  United  Kingdom. —  The  Living  Age. 

The  record  is  both  convenient  and  complete.  Altogether  it  is  an  unusually 
important  and  workmanlike  compilation  of  the  current  history  of  social  politics. 
—  Springfield  Republican.  « 

A  real  economy  whether  in  purchase  by  the  pupil  or  for  purposes  of  reference 
by  the  teacher.  —  History  Magazine. 


GINN  AND  COMPANY  Publishers 


MONEY  AND   BANKING 

{FOURTH  REVISION) 
By    HORACE    WHITE 

Revised  and  continued  to  the  year  igji 

8vo,  cloth,  xvi  +  491  pages,  ^1.50 


FROM  its  first  publication  Horace  White's  "Money  and  Bank- 
ing" has  supplied  the  urgent  demand  both  of  the  intelligent 
public  and  of  the  student  for  a  book  on  monetary  and  banking 
theory  which  should  be  at  once  a  record  and  an  interpretation  of 
the  financial  history  of  the  country.  The  third  edition  widens  the 
scope  of  the  work  by  the  comparative  study  of  foreign  banking 
systems,  by  a  study  of  the  causes  of  the  panic  of  1907,  and  by  an 
exposition  of  the  situation  which  followed  it.  It  contains  the  texts 
of  the  Aldrich-Vreeland  Act,  of  the  bill  proposed  by  the  Currency 
Commission  of  the  American  Bankers'  Association,  and  summaries 
of  the  Fowler  Bill  and  of  the  report  of  the  Currency  Committee  of 
the  New  York  Chamber  of  Commerce.  Special  attention  is  given 
to  the  central  bank  question,  and  to  cognate  subjects. 

September  8,  igo8 
Allow  me  to  congratulate  you  on  the  new  edition  of  White's 
Money  and  Banking  which  has  just  been  issued,  and  to  thank  you 
most  sincerely  for  sending  me  a  copy,  which  I  am  glad  to  see  is 
right  up  to  date.  There  is  no  single  book  that  I  have  used  as  much, 
quoted  as  much,  or  advised  as  many  people  to  buy,  as  Money  and 
Banking.  When  I  was  in  Washington  I  used  to  have  a  great  many 
inquiries,  not  only  from  young  men  who  wanted  to  know  what  to 
read  to  post  themselves,  but  also  from  bankers,  members  of  Con- 
gress, and  other  people,  who  visited  me  personally  or  wrote  to  the 
office  asking  for  a  list  of  books.  I  never  failed  to  say  that  Money 
and  Banking,  for  the  size  of  it,  came  nearer  covering  the  whole  sub- 
ject than  anything  else. 

WILLIAM  BARRET  RIDGELY 

Formerly  Comptroller  of  the  Currency 

GINN  AND  COMPANY  Publisheks 


BY  PAUL  S.  REINSCH 

READINGS  ON 
AMERICAN  FEDERAL  GOVERNMENT 

8vo,  cloth,  xii  +  850  pages,  $2.75 

"  Readings  on  American  Federal  Government "  is  a  source  book. 
Students  of  history  have  many  such,  but  hitherto  the  student  or 
teacher  of  political  science  has  had  to  rely  to  a  very  great  extent  on 
texts  which,  though  indicating  source  material,  did  not  make  it 
readily  accessible.  The  book  contains  in  a  single  volume  a  large 
amount  of  documentary  material  illustrative  of  almost  every  branch 
of  our  government  as  it  is  to-day.  The  selections  are  mainly  from 
the  written  or  spoken  words  of  men  actually  engaged  in  the  business 
of  government  —  presidents,  legislators,  administrative  officials, 
and  judges. 

READINGS  ON 
AMERICAN  STATE  GOVERNMENT 

8vo,  cloth,  vi  +  473  pages,  ^2.25 

This  is  a  source  book  on  American  state  government,  similar  in 
method  to  the  author's  "  Readings  on  American  Federal  Govern- 
ment." Like  its  predecessor,  it  directs  attention  to  movements  of 
current  significance.  The  most  vital  phases  in  the  governments  of 
the  most  important  states  are  chosen  for  representation,  and  every 
selection  is  by  some  official  or  other  person  intimately  connected 
with  the  matter  considered. 

186/3 

GINN  AND   COMPANY  Publishers 


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